Suppose the market portfolio has an expected return of 10 % and a volatility of 20%, while Microsoft's stock has a volatility of 30%. a. Given its higher volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10 %1? b. What would have to be true for Microsoft's equity cost of capital to be equal to 10 %10%? a. Given its higher volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10%

(Select the best choice below.)

A. No, volatility includes diversifiable risk, and so cannot be used to assess the equity cost of capital.

B. Yes, higher volatility implies higher risk, so Microsoft is riskier than the market and should therefore have a higher return.

C. Yes, although some of Microsoft's risk is diversifiable, enough is systematic so that it should have a higher return than the market.

D. There is not enough information in this problem to answer this question definitively.

b. What would have to be true for Microsoft's equity cost of capital to be equal to ? (Select from the drop-down menus.)