Systematic versus Unsystematic Risk Consider the following information about Stocks I and II:
State of Economy | Probability of State of Economy | Rate of Return if State Occurs | |
Stock I | Stock II | ||
Recession | .15 | .09 | –.30 |
Normal | .55 | .42 | .12 |
Irrational exuberance | .30 | .26 | .44 |
The market risk premium is 7.5 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riskier”? Explain.
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