Corporate Finance
Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
Question
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Chapter 11, Problem 33QAP
Summary Introduction

Adequate information:

Market risk premium (MRP) =7.5%

Risk-free rate (R f) =4%

Probability of recession (PR) = 0.15

Probability of normal state (PN) =0.55

Probability of irrational exuberance (PIE) =0.30

Rate of return of Stock 1 in Recession (R1R) =0.12

Rate of return of Stock 1 in normal state (R1N) =0.17

Rate of return of Stock 1 in irrational exuberance (R1IE) =0.06

Rate of return of Stock 2 in recession (R2R) =-0.35

Rate of return of Stock 2 in normal state (R2N) =0.12

Rate of return of Stock 2 in irrational exuberance (R2IE) =0.33

To determine: Stock with more systematic risk, a stock with more unsystematic risk, and the riskier stock.

Introduction: The risk associated with any stock depends upon the standard deviation and expected return generated by the respective stock.

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Chapter 11 Solutions

Corporate Finance

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