Consider the following information about Stock I and II
State of Economy Probability of State of Economy Rate of Returns If State Occurs
Stock I Stock II
Recession 0.25 0.02 -0.25
Normal 0.50 0.21 0.90
Irrational exuberance 0.25 0.06 0.44
The market risk premium is 7 percent, and the risk-free rate is 4 percent.
(a) Which stock has the most systematic risk?
(b) Which one has the most unsystematic risk?
(c) Which stock is riskier? Explain