Question

Consider the following information on Stocks I and II: Probability of Rate of Retum if State State of Occurs State of Economy
b. Lalculate le standard deviduori ol EDT SOCR. (06 hot rouna int calculations and enter your answers as a percent rounded to
0 0
Add a comment Improve this question Transcribed image text
Answer #1

Answer a.

Stock I:

Expected Return = 0.25 * 0.04 + 0.60 * 0.22 + 0.15 * 0.16
Expected Return = 0.1660 or 16.60%

Expected Return = Risk-free Rate + Beta * Market Risk Premium
16.60% = 4.00% + Beta * 7.00%
12.60% = Beta * 7.00%
Beta = 1.80

Stock II:

Expected Return = 0.25 * (-0.22) + 0.60 * 0.15 + 0.15 * 0.45
Expected Return = 0.1025 or 10.25%

Expected Return = Risk-free Rate + Beta * Market Risk Premium
10.25% = 4.00% + Beta * 7.00%
6.25% = Beta * 7.00%
Beta = 0.89

Answer b.

Stock I:

Variance = 0.25 * (0.04 - 0.166)^2 + 0.60 * (0.22 - 0.166)^2 + 0.15 * (0.16 - 0.166)^2
Variance = 0.005724

Standard Deviation = (0.005724)^(1/2)
Standard Deviation = 0.0757 or 7.57%

Stock II:

Variance = 0.25 * (-0.22 - 0.1025)^2 + 0.60 * (0.15 - 0.1025)^2 + 0.15 * (0.45 - 0.1025)^2
Variance = 0.045469

Standard Deviation = (0.045469)^(1/2)
Standard Deviation = 0.2132 or 21.32%

Answer c.

Stock I has most systematic risk than Stock II.

Answer d.

Stock II has most systematic risk than Stock I.

Answer e.

Stock I is more riskier.

Add a comment
Know the answer?
Add Answer to:
Consider the following information on Stocks I and II: Probability of Rate of Retum if State...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Consider the following information on Stocks I and II: Rate of Return if State Probability of...

    Consider the following information on Stocks I and II: Rate of Return if State Probability of Occurs State of State of Economy Economy Stock! Stock II Recession .27 .030 --22 Normal .62 .330 .14 Irrational .11 .190 42 exuberance The market risk premium is 11.2 percent, and the risk-free rate is 4.2 percent. a. Calculate the beta and standard deviation of Stock I. (Do not round Intermediate calculations. Enter the standard deviation as a percent and round both answers to...

  • Consider the following information on Stocks I and II: Probability of State of Economy Rate of...

    Consider the following information on Stocks I and II: Probability of State of Economy Rate of Return if State Occurs Stock Stock Il -22 .15 State of Economy Recession Normal Irrational exuberance .04 22 .45 The market risk premium is 7 percent, and the risk-free rate is 4 percent. a. Calculate the beta of each stock. (Do not round intermediate calculations your answers to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of each stock. (Do not round...

  • Consider the following information on Stocks I and II: Probability of State of Economy .25 .60...

    Consider the following information on Stocks I and II: Probability of State of Economy .25 .60 State of Economy Recession Normal Irrational exuberance Rate of Return if State Occurs Stock Stock Il -22 .22 1.04 .15 45 The market risk premium is 7 percent, and the risk-free rate is 4 percent. a. Calculate the beta of each stock. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of each...

  • Consider the following information on Stocks I and II: Probability of State of Economy .25 .60...

    Consider the following information on Stocks I and II: Probability of State of Economy .25 .60 State of Economy Recession Normal Irrational exuberance Rate of Return if State Occurs Stock Stock Il -22 .22 1.04 .15 45 The market risk premium is 7 percent, and the risk-free rate is 4 percent. a. Calculate the beta of each stock. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of each...

  • onsider the following information on Stocks I and II: Rate of Return if State Occurs Probability...

    onsider the following information on Stocks I and II: Rate of Return if State Occurs Probability of State of Economy Stock Il Stock I .055 State of Economy Recession Normal Irrational exuberance 24 .64 - 39 365 31 49 12 .225 The market risk premium is 11.9 percent, and the risk-free rate is 4.9 percent a. Calculate the beta and standard deviation of Stock I. (Do not round intermediate calculations. Enter the standard deviation as a percent and round both...

  • Consider the following information on Stocks I and II:   State of Economy Probability of State of...

    Consider the following information on Stocks I and II:   State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II   Recession .25 .04 −.22           Normal .60 .22 .15           Irrational exuberance .15 .16 .45         The market risk premium is 7 percent, and the risk-free rate is 4 percent. a. Calculate the beta of each stock. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b....

  • Consider the following information on Stocks I and II:   State of Economy Probability of State of...

    Consider the following information on Stocks I and II:   State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II   Recession .25 .04 −.22           Normal .60 .22 .15           Irrational exuberance .15 .16 .45         The market risk premium is 7 percent, and the risk-free rate is 4 percent. a. Calculate the beta of each stock. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b....

  • Consider the following information on Stocks I and II:   State of Economy Probability of State of...

    Consider the following information on Stocks I and II:   State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II   Recession .25 .04 −.22           Normal .60 .22 .15           Irrational exuberance .15 .16 .45         The market risk premium is 7 percent, and the risk-free rate is 4 percent. a. Calculate the beta of each stock. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b....

  • Consider the following information on Stocks I and II

    Consider the following information on Stocks I and II:   State of EconomyProbability ofState of EconomyRate of Return if State OccursStock IStock II  Recession.26.025−.21          Normal.61.325.13          Irrational exuberance.13.185.41          The market risk premium is 11.1 percent, and the risk-free rate is 4.1 percent.a.Calculate the beta and standard deviation of Stock I. (Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16.)b.Calculate the beta and standard deviation of Stock II. (Do not round intermediate calculations. Enter...

  • Consider the following information about Stocks I and II Consider the following information on Stocks I...

    Consider the following information about Stocks I and II Consider the following information on Stocks I and Il: Probability of State of Economy Rate of Return if State Occurs Stock Stock II State of Economy Recession Normal Irrational exuberance 20 55 25 02 32 18 -20 12 40 The market risk premium is 7 percent, and the risk-free rate is 4 percent Requirement 1: (a) Calculate the beta and standard deviation of Stock I. (Do not round intermediate calculations. Enter...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT