Q3. Suppose Tex stock has a volatility of 36%, and Mex stock has a volatility of 18%. If Tex and Mex are uncorrelated, a. Construct a portfolio with positive weights in both stocks and that has the same volatility as MEX alone. b. What portfolio of the two stocks has the smallest possible volatility? Q4. Suppose that the average stock has a volatility of 46%, and that the correlation between pairs of stocks is 23%. Estimate the volatility of an equally weighted portfolio with: a. 1 stock b. 30 stocks c. 1,000 stocks

Q4.

You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of

10%.

However, the new business will be

27%

debt financed, and you anticipate its debt cost of capital will be

5%.

If its corporate tax rate is

35%,

what is your estimate of its WACC?

The equity cost of capital is --%?