6. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows:
The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. What is the beta and standard deviation of Stock I? (Points: 3)
1.2 and 24%
0.6 and 12%
1.2 and 12.5%
Cannot be determined with the information given
7. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows:
The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. Which statement is true? Select all that apply: (Points: 4)
Stock II has more risk than Stock I
Stock II has less systematic risk than Stock I
Stock I has a higher risk premium than Stock II
Stock I has a greater expected return than Stock II
Problem 30
LO 3 30. Systematic versus Unsystematic Risk. 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 | .02 | -.20 |
| Normal | .60 | .32 | .12 |
| Irrational exuberance | .15 | .18 | .40 |
The market risk premium is 11 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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