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.