The goal is to estimate the cost of capital of a small software company, Codestart, using CAPM and the Fama-French 3-Factor Model. The risk-free rate is 4% and the excess expected return on the market index is 8.6%.

(a)According to the CAPM the beta of Codestart is 2.3. What is the CAPM expected return of Codestart?

(b)What would be the expected return on Codestart if the covariance of returns between Codestart and "M" doubles?

(c)Estimating the factor loadings for the Fama-French model, you find that Codestart's b_m = 1.58, b_SMB=1.19 and b_HML= -0.15. Given that the expected return on the SMB factor is 5.2%, and the expected return on the HML factor is 4.8%, what is the expected return of Codestart according to the Fama-French 3-Factor Model?

(d)Using the Fama-French model, what is the systematic volatility (standard deviation) of Codestart stock given that the volatility of the market index is 16%, the volatility of the SMB factor is 15% and the volatility of HML factor is 13%?