BUSN 379
This is problem 30 in the text (information from this problem is needed to answer the questions I need to answer)
(only answer what is in red)
Consider the following information on stocks 1 and 2:
rate of return if state occurs
State of economy Probability of state of economy stock 1 stock 2
Recession 0.25 0.02 -0.2
Normal 0.6 0.32 0.12
irrational exuberance 0.15 0.18 0.4
The market risk premium is 11 percent, an 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.
Assume that the probability of the state of the economy has changed as follows:
The probability of the recession has increased to 30% and the probability for an normal state of economy is now 40%.
The market risk premium has increased by 1% as well. What is the standard deviation of the stock 1 and 2 respectively?
a.) 12 and 20%
b.) 12.5 and 23%
c.) 1.25 and 2.326%
d.) cannot be determined with the information given
The probability of a recession has increased to 30% and the probability for normal state of economy is now 40%.
The market risk premium has increased by 1% as well. Which state is true? Select all that apply:
a.) stock 2 has more risk than stock 1
b.) stock 2 has less systematic risk than stock 1
c.) stock 1 has a higher risk premium than stock 2
d.) stock 1 has a greater expected return than stock 2
State of economy
Recession
Normal
irrational exuberance
Standard deviation
State of economy
Recession
Normal
irrational exuberance
Systematic Risk
Expected return
Market risk Premium
Risk Free Rate
Beta (systematic Risk)
Expected return = RF + Beta X Market Risk Premium
Beta (systematic Risk)
Beta (systematic Risk)
