Question

Consider the following information about Stocks I and II: Rate of Return If State Occurs Stock State of Economy Recession Normal Irrational exuberance Probability of State of Economy .26 56 Stock Il -.34 20 The market risk premium is 5 percent, and the risk-free rate is 3 percent. (Do not round Intermediate calculations. Enter your standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.18. Round your bets answers to 2 decimal places, e.g., 32.16.)

Answer 1

returul 0-26x 0.03 + 0.56 40.20+ 0.188 0.09 0.136 Freturn (stock 11) - 0.26% (-0-34) +0.56014+ 0-18x0.44 - 0.087 0009 I return deviation - 0-106 - 10.00u - 0.03 0.136 0.064 = 0.20-0.136 -0.046 = 0.09-0.136 I 0.34-0.087 - - 00427 +0.14 -0.087 - 0-053 0.54-0.887 - 0.453 Protability Producte squared retser deviation 1o-oo88 0.182 0.002 0.0473 o-oot! 0.0369 0.0853 0.26 0.56 0.18 cool 8.040 0.002 € sum. 6-0003 0.025 00205 deviation stand and I Variance I I 0.0255 0.0853 00292 00159 ACC to CARM &(o) - soft sem So I 0005 0136 - 003 + B (sm-8 . [Pg - 2012 0.087-003 a 2 x0.05 By - 1014 hickier