Estimate the most systematic risk, Financial Management

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Yang Su is considering the following information on two stocks:

                                                                             Rate of Return

State of Economy     Probability       Catherine Lam Inc.(A)     David So Ltd(B)

Recession                    0.30                     0.08                                  -0.20

Normal                        0.50                     0.40                                    0.15

Boom                          0.20                     0.20                                    0.42

The market risk premium is 8% and the risk free rate is 6%. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is riskier? Explain

 


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