Question 3 (15 points):

Consider the following information on Stock I and II:

		Rate of Return if State Occurs
State of Economy	Probability of State of Economy	Stock I	Stock II
Recession	0.15	0.09	-0.30
Normal	0.70	0.42	0.12
Irrational exuberance	0.15	0.26	044

The market risk premium is 10%, and the risk-free rate is 4%.

a. What is the expected return on Stock I?

b. What is the expected return on Stock II?

c. Which stock has the most systematic risk?