You are given the following information about Stock 1 and Stock 2.

The market risk premium is 8% and the risk-free rate is 4%.

QNS 1) 30 MARKS

Use an appropriate tool to help you work out the following.

a) Calculate the expected returns of Stock 1 and Stock 2.

b) Appraise which stock has the higher systematic risk.

c) Compute the total risk of each stock market.

d) Appraise which stock is riskier.

QNS 2) 10 MARKS

Discuss whether a risky asset can have a negative beta and what the CAPM predicts about its return.

Rate of Return if State Occurs State of Economy Probability of State of Economy Stock 1 Stock 2 Recession Normal Boom 0.25 0.5 0.11 0.29 0.13 -0.4 0.10 0.56 0.25