Problem 13-26 Systematic versus Unsystematic Risk [LO3] The market risk premium
ID: 2749762 • Letter: P
Question
Problem 13-26 Systematic versus Unsystematic Risk [LO3]
The market risk premium is 8 percent, and the risk-free rate is 6 percent. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16. Enter your return answers as a percent. )
The standard deviation on Stock I's return is _____ percent, and the Stock I beta is 1.025. The standard deviation on Stock II's return is _______ percent, and the Stock II beta is ______. Therefore, based on the stock's systematic risk/beta, Stock I is "riskier".
Consider the following information about Stocks I and II:Explanation / Answer
Stock 2 beta :
expected return = risk-free rate + beta * (market risk premium)
9.95 = 6+beta*8
beta = 0.49375
Scenario Probability Return =rate of return * probability Actual return -expected return(A) (A)^2* probability Recession 0.3 8 2.4 -6.2 11.532 Normal 0.45 19 8.55 4.8 10.368 exuberance 0.25 13 3.25 -1.2 0.36 Expected return = sum of weighted return = 14.2 Sum(Variance)= 22.26 Standard deviation= Standard deviation of stock A =(sum)^(1/2) 4.718050445 Stock B Scenario Probability Return =rate of return * probability Actual return -expected return(B) (B)^2* probability Recession 0.3 -27 -8.1 -36.95 409.59075 Normal 0.45 14 6.3 4.05 7.381125 exuberance 0.25 47 11.75 37.05 343.175625 Expected return = sum of weighted return = 9.95 Sum= 760.1475 Standard deviation= Standard deviation of stock B =(sum)^(1/2) 27.57077257