Background info:
rr if state occurs
State of the economy Probability of state of econ Stock 1 Stock 2
Recession .25 .02 -.20
Normal .60 .32 .12
Irrational exuberance .15 .18 .40
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 standard deviation of Stock I and II respectively?
A.) 12 and 20%
B). 12.5 and 23%
C). 1.25 and 2.326%
D). Cannot be determined with the information given