Adequate information: Market risk premium (MRP) =7.5% Risk-free rate (R f ) =4% Probability of recession (P R ) = 0.15 Probability of normal state (P N ) =0.55 Probability of irrational exuberance (P I E ) =0.30 Rate of return of Stock 1 in Recession (R1 R ) =0.12 Rate of return of Stock 1 in normal state (R1 N ) =0.17 Rate of return of Stock 1 in irrational exuberance (R1 I E ) =0.06 Rate of return of Stock 2 in recession (R2 R ) =-0.35 Rate of return of Stock 2 in normal state (R2 N ) =0.12 Rate of return of Stock 2 in irrational exuberance (R2 I E ) =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, Problem 33QAP

Summary Introduction

Adequate information:

Market risk premium (MRP) =7.5%

Risk-free rate (R _f) =4%

Probability of recession (P_R) = 0.15

Probability of normal state (P_N) =0.55

Probability of irrational exuberance (P_I_E) =0.30

Rate of return of Stock 1 in Recession (R1_R) =0.12

Rate of return of Stock 1 in normal state (R1_N) =0.17

Rate of return of Stock 1 in irrational exuberance (R1_I_E) =0.06

Rate of return of Stock 2 in recession (R2_R) =-0.35

Rate of return of Stock 2 in normal state (R2_N) =0.12

Rate of return of Stock 2 in irrational exuberance (R2_I_E) =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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