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Consider the following information about Stock I and II. The market risk premium is 10 percent
and the risk-free rate is 3 percent.
1) Which stock is riskier if it is to be held as part of a well-diversified portfolio?
2) If you invest 65% of your wealth in Stock I and the remaining in Stock II, what is the
systematic risk of your portfolio?Rate of ReturnState of EconomyProbabilityStock IStock
IIRecession0.300.04-0.15Normal0.600.150.06Irrational exuberance0.100.050.35

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