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You are given the following information about Stock 1 and Stock 2. Rate of Return if State Occurs State of Economy Probability of State of
You are given the following information about Stock 1 and Stock 2. 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 0.25 0.11 0.29 0.13 -0.4 0.10 0.56 The market risk premium is 8% and the risk-free rate is 4%. (a) Use an appropriate computing tool to help you work out the following. (i) Calculate the expected returns of Stock 1 and Stock 2. Appraise which stock has the higher systematic risk. (iii) Compute the total risk of each stock. (iv) Appraise which stock is riskier. (6) Discuss whether a risky asset can have a negative beta and what the CAPM predicts about its return
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