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Asset Expected Return Riskless Debt 3.5% Market portfolio 10% Well-diversified portfolio of firms exposed to oil prices 11% Well-diversified portfolio of firms with no exposure
| Asset | Expected Return |
| Riskless Debt | 3.5% |
| Market portfolio | 10% |
| Well-diversified portfolio of firms exposed to oil prices | 11% |
| Well-diversified portfolio of firms with no exposure to oil prices | 9% |
| Well-diversified portfolio of firms exposed to gold prices | 14% |
| Well-diversified portfolio of firms with no exposure to gold prices | 13.4% |
- 8 points: What is the value of the gold factor you can construct with these assets?
- 8 points: What is the value of the value of the oil factor you can construct with these assets?
- 9 points: You are attempting to find the cost of equity for a firm using a factor model with the following factors and betas:
| Factor | Beta |
| CAPM market factor | 1.1 |
| Gold factor from Part A | 1.6 |
| Oil factor from Part B | 0.8 |
What would you estimate this firms cost of equity to be?
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