NOTE: The CLICK TO SELECT dropdown gives option to select either Stock I or Stock II.
State of Economy | Probability of Economy(X) | Stock I | Stock II |
recession | 0.25 | 3.00% | -32.00% |
normal | 0.5 | 23.00% | 12% |
boom | 0.25 | 7% | 52.00% |
Expected return E(X)=sum of(x*P(X)) |
14.00% | 11.00% | |
E(X^2) | 0.0279 | 0.1004 | |
Variance=E(X^2)-E(X)^2 |
0.0083 | 0.0883 | |
Standard deviation=sqrt(Variance) |
9.11% | 29.72% |
Expected return = risk free rate + beta * market risk premium
=>
beta of stock I = (14% - 2%)/6%
= 2
beta of stock II = (11% - 2%)/6%
= 1.5
based on bets, Stock I is riskier
NOTE: The CLICK TO SELECT dropdown gives option to select either Stock I or Stock II....
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