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
