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Systematic versus Unsystematic Risk (LO2, CFA4) 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 .30 .05 -.18
Normal .40 .19 .14
Irrational exuberance .30 .13 .29
The market risk premium is 8 percent, and the risk-free rate is 5 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riskier”?
Explain.
The cost of debt is lower than the costs of stocks. Cost of Preferred stock is higher than the cost of common stocks.
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Consider the following information: Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C Boom .17 .358 .458 .338 Good .43 .128 .108 .178 Poor .33 .018 .028 ?.062 Bust .07 ?.118 ?.258 ?.098 Requiremen..
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JJ Industries will pay a regular dividend of $2.40 per share for each of the next four years. At the end of the four years, the company will also pay out a $40 per share liquidating dividend, and the company will cease operations. If the discount rat..
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