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Systematic versus Unsystematic Risk (LO2, CFA4) Consider the following information on Stocks I and II: State of Economy; Probability of State of Economy; Rate of

Systematic versus Unsystematic Risk (LO2, CFA4) Consider the following information on Stocks I and II:

State of Economy; Probability of State of Economy; Rate of Return If State Occurs

Stock I Stock II

Recession .30 .05 -.18

Normal .40 .19 .14

Irrational exuberance .30 .13 .29

The market risk premium is 8 percent, and the risk-free rate is 5 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is riskier?

Explain.

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