You have the following investments available to you: Asset | Yearly return as of today Riskless debt 2% S&P500 index fund 11% Well diversified portfolio of firms unaffected by extreme weather events 9.5% Well diversified portfolio of firms vulnerable to extreme weather events 14%

a. If you were going to build an APT style model with a market factor and an extreme weather factor using this data, what value would these two factors currently take?

b. What are two ways you could estimate a companys betas under this model? What information would you need to make each of these estimates?

c. Using this model, what is your estimate of the cost of equity for a firm with a market beta of 1.4 and a weather beta of 0.6?