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Consider the following information on Stocks I and II: Rate of Return if State Occurs Economy Probability of State of Economy Stock I Stock II Recession
Consider the following information on Stocks I and II:
Rate of Return if State Occurs
Economy Probability of State of Economy Stock I Stock II
Recession .23 .05 -.38
Normal .63 .36 .3
Irrational Exuberance .14 .22 .48
The market risk premium is 11.8%, and the risk-free rate is 4.8%.
Calculate the beta and standard deviation of Stock I and Stock II
Expert Solution
Beta ;
Stock I = 1.87
Stock II = 1.02
Standard deviation ;
Stock I = 12.88%
Stock II = 30.61%
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