Rate of Return if State Occurs Calculate the beta and standard deviation of Stoc

Question

Rate of Return if State Occurs

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).)

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Consider the following information on Stocks I and II:

Explanation / Answer

First we calculate the expected return for each stock

Which can be found out by sum of ( probaility of state * exptected return in that state)

Fr ex Stoc 1 .24*65% +0.69*37% + 0.07*23%

= 42%

Expected return = rsk free rate + B* Market risk premium

42% =4.9% + B * 11.9%

=37.1/11.9

B=3.9

For stock B

18% = 4.9% + B* 11.9%

13.1/11.9 =1.1

Stock with higher beta has higher systemtic risk as beta is measure of sytemetic risk

As stock 1 has higher systemtic risk so it has lower unsystemetic risk

Stock with higher beta is more riskier hence stock 1 has higher risk

Probability 1 2 0.24 65% -29% 0.69 37% 21% 0.07 23% 49% Expected return 42% 11%

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