Question
16 . How does the relationship between the average return and the historical volatility of individual stocks differ from the relationship between the average return
16. How does the relationship between the average return and the historical volatility of individual stocks differ from the relationship between the average return and the historical volatility of large, well-diversified portfolios?
25. Explain why the risk premium of a stock does not depend on its diversifiable risk.
2. Suppose a market portfolio has an expected return of 10% and a volatility of 20%, while Microsofts stock has a volatility of 30%: Answer A and B
a. Given its higher volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10%?
b. What would have to be true for Microsofts equity cost of capital to be equal to 10%?
18. Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtins equity beta is 0.85, the risk-free rate is 4%, and the market risk premium is 5%. If your firms project is all equity financed, estimate its cost of capital.
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