30. Systematic versus Unsystematic Risk Consider on Stocks I and II: State of Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Economy Recession -.22 .25 .04 Normal .15 .22 .60 Irrational exuberance .15 .16 .45 The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has more systematic risk? Which one has more unsystematic risk? Which stock is "riskier"? Explain.
30. Systematic versus Unsystematic Risk Consider on Stocks I and II: State of Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Economy Recession -.22 .25 .04 Normal .15 .22 .60 Irrational exuberance .15 .16 .45 The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has more systematic risk? Which one has more unsystematic risk? Which stock is "riskier"? Explain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:b. Assuming the capital asset
than Stock B's beta by .30, what is the expected market risk
30. Systematic versus Unsystematic Risk Consider the following information
LO 3
on Stocks I and II:
State of
Economy
Probability of State
of Economy
Rate of Return if State Occurs
Stock I
Stock II
Recession
-.22
.04
.25
Normal
.15
.60
.22
Irrational exuberance
.15
.16
.45
The market risk premium is 7 percent, and the risk-free rate is 4 percent.
Which stock has more systematic risk? Which one has more unsystematic
risk? Which stock is "riskier"? Explain.
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