Rate of Return If State Occurs State of Probability of Economy State of Economy
ID: 2749630 • Letter: R
Question
Rate of Return If State Occurs State of Probability of Economy State of Economy Stock I Stock II
Recession .20 .04 .35 Normal .60 .26 .15 Irrational exuberance .20 .10 .55 The market risk premium is 5 percent, and the risk-free rate is 4 percent. The standard deviation on Stock I's return is _____percent, and the Stock I beta is______ . The standard deviation on Stock II's return is ______percent, and the Stock II beta is ______. Therefore, based on the stock's systematic risk/beta, _______Stock is "riskier".
Explanation / Answer
Probability Stock I Stock II risk free rate 4% 0.2 4.00% -35.00% Risk Premium 5% 0.6 26.00% 15.00% Beta Stock 1= 2.88 0.2 10.00% 55.00% Beta Stock 2= 1.8 Expected Return 18.40% 13.00% Stock 1 std dev= 9.50% Stock 2 std dev= 25.85% Stock 1 is riskier(high beta)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.