Both answers given for part B are incorrect from another chegg person. Please an

Question

Both answers given for part B are incorrect from another chegg person. Please answer them correctly.

Consider the following information on Stocks I and II: The market risk premium is 11.9 percent, and the risk-free rate is 4.9 percent. Calculate the beta and standard deviation of Stock I. (Do not round intermediate calculations. Enter the standard deviation as a percentage. Round your answers to 2 decimal places (e.g., 32.16).) Calculate the beta and standard deviation of Stock II. (Do not round intermediate calculations. Enter the standard deviation as a percentage. Round your answers to 2 decimal places (e.g., 32.16).) Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is "riskier"?

Explanation / Answer

Expected return of Stock II = probability * return

= (-0.29* 0.24) + (0.21*0.69) + (0.49*0.07)

=-0.0696+0.1449+0.343
= 0.1096 or 10.96%

Beta = (Expected Return - Risk free rate)/Market risk premium

Beta II = (10.96%-4.9%)/11.9% = 0.5092= 0.51% (rounded to 2 decimals)

Variance =  WA2SDA2 +WB2SDB2 + 2*WA*WB*CovAB
Standard Deviation = SQRT(Variance)

State of economy

State of economy

Probability Stock 2 Rate of return Actual return return Boom 0.24 -0.29 -0.0696 0.017004 Normal 0.69 0.21 0.1449 0.4761 Bust 0.07 0.49 0.0343 0.0049 expected return 10.96% Variance 33.29% Standard deviation 5.77%

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