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The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the

The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is riskier? Explain.

State of economy state of economy Stock I Stock II

Recession .20 .02 -.20

Normal .55 .32 .12

Irrational exuberance .25 .18 .40

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