Chapters 8-10 inPrinciples of Managerial Finance

Question 1

Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. What are two types of firm that might exhibit low correlations of returns with the overall stock market? Why the correlations of these firms are expected to be low?

Question 2

In general, the cost of debt capital is lower than the cost of equity capital. For this reason, it might be expected that firms with high debt ratios would have a lower weighted average cost of capital. What are the reasons why this is not the case?