Question
Yang Su is considering the following information on two stocks: Catherine Lam Inc.(A) 1) State of Economy: Recession Probability: 0.3 Rate of return:0.8 2) State
Yang Su is considering the following information on two stocks:
Catherine Lam Inc.(A)
1) State of Economy: Recession
Probability: 0.3
Rate of return:0.8
2) State of Economy: Normal
Probability:0.5
Rate of return:0.4
3) State of Economy: boom
Probability:0.2
Rate of return:0.2
David So Ltd(B)
1) State of Economy: Recession
Probability:0.3
Rate of return:-0.2
2) State of Economy: normal
Probability:0.5
Rate of return:0.15
3) State of Economy: boom
Probability:0.2
Rate of return:0.42
The market risk premium is 8% and the risk free rate is 6%. Which stock has the most systematic
risk? Which one has the most unsystematic risk? Which stock is riskier? Explain.
Step by Step Solution
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Bond Markets Analysis and Strategies
Authors: Frank J.Fabozzi
9th edition
133796779, 978-0133796773
