edProblem 13-26 Systematic versus Unsystematic Risk [LO3]Consider the following information about Stocks I and II:Rate of Return if StateOccursProbability of State ofState of EconomyRecessionEconomyStock I.26.05Stock II-.31Normal.50.22.11Irrational exuberance.24.05.51The market risk premium is 5 percent, and the risk-free rate is 3 percent. (Do not roundintermediate calculations. Enter your standard deviation answers as a percentrounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimalplaces, e.g., 32.16.)The standard deviation on Stock I's return isdeviation on Stock II's return isesstock's systematic risk/beta, Stockpercent, and the Stock I beta isThe standardpercent, and the Stock II beta isTherefore, based on theis "riskier".

Economic conditionProbability =PStock I return =R1Expected Return Stock 1=P*R1Mean Return Stock…

Answered: ed Problem 13-26 Systematic versus…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Stock A B Expected Return 10% 15 Correlation-1 Standard Deviation 5% 10 Suppose that it is possible to borrow at the risk-free rate, r What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.)
( t nces Problem 13-26 Systematic versus Unsystematic Risk [LO3] Consider the following information about Stocks I and II: State of Economy Recession Normal Irrational exuberance Probability of State of Economy 25 45 30 Rate of Return if State Occurs The standard deviation on Stock I's return is deviation on Stock Il's return is stock's systematic risk/beta, Stock Stock I 02 30 08 Stock II -.33 13 53 The market risk premium is 8 percent, and the risk-free rate is 5 percent. (Do not round intermediate calculations. Enter your standard deviation answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 2 decimal places, e.g., 32.16.) percent, and the Stock I beta is percent, and the Stock Il beta is is "riskier". The standard Therefore, based on the
b. Assuming the capital asset than Stock B's beta by .30, what is the expected market risk 30. Systematic versus Unsystematic Risk Consider the following information LO 3 on Stocks I and II: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Recession -.22 .04 .25 Normal .15 .60 .22 Irrational exuberance .15 .16 .45 The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has more systematic risk? Which one has more unsystematic risk? Which stock is "riskier"? Explain.
QUESTION 1 Consider the following information on stocks I and II: State of probability of Rate of Return if state Occurs state of Econ. Stock I Stock II 0.20 0.06 0.55 0.47 0.25 0.23 The market risk premium is 8%, and the risk free rate is 6%. Economy Recession Normal Boom a) Which stock has the most Systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain. -0.25 0.11 0.68
Question 16 a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 55 percent? c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market…
Question 7 Consider the following Information: Portfolio ER Risk Free Market SD 6.00 13.2 A 11.2 a. Calculate the Sharpe ratios for the market portfolio and portfolio A Sharpe Ratio=(Return on portfolio-Riskfreerate)/SD Market Portfo 0.2 Portfolio A 0.21 2.1 b. If the simple CAPM is valid, is the above situation possible? 0.00 36 25 Beta Market Beta A
00 in G Rate of Return if State Occurs Stock II -.16 .14 .21 State of Economy Probability of State of EconomyStock I Recession Normal Irrational exuberance.10 .35 .55 .05 .11 .15 The market risk premium is 10 percent and the risk-free rate is 5 percent. a. What is the beta for each stock? b. Which stock has the most systematic risk? c. What is the standard deviation for each stock? d. Which stock has the most unsystematic risk? e. Which stock is "riskier"?
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