The market risk premium is 8 percent, and the risk-free rate is 5 percent. (Do n
ID: 2749646 • Letter: T
Question
The market risk premium is 8 percent, and the risk-free rate is 5 percent. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16. Enter your return answers as a 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".
Consider the following information about Stocks I and II:Explanation / Answer
Expected return od Stock I = 0.30 * 4% + 0.50 * 16% + 0.20 * 5%
= 10.20%
Expected return od Stock II = 0.30 * -19% + 0.50 * 6% + 0.20 * 39%
= 5.10%
Standard deviation of Stock I = sqrt[0.30 * (4% - 10.2%)2 + 0.50 * (16% - 10.2%)2 + 0.20 * (5% - 10.2%)2]
= 5.81%
Standard deviation of Stock II = sqrt[0.30 * (-19% - 5.1%)2 + 0.50 * (6% - 5.1%)2 + 0.20 * (39% - 5.1%)2]
= 20.11%
Beta of Stock I = (10.20% - 5%) / 8%
= 0.65
Beta of Stock II = (5.10% - 5%) / 8%
= 0.01
Based on systemic risk Stock II is riskier.
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