2. Suppose the market portfolio has an expected return of 10% and a volatility of 20%, while Microsoft’s stock has a volatility f 30%.
a. Given its higher volatility, should we expect Microsoft to have an equity cost of capital that is higher than 10%?
b. What would have to be true for Microsoft’s equity cost of capital to be equal to 10%?
5. Using the data in Problem 4, suppose you are holding a market portfolio, and have invested $12,000 in Stock C.
a. How much have you invested in Stock A?
b. How many shares of Stock B do you hold?
c. If the price of Stock C suddenly drops to $4 per share, what trades would you need to make to maintain a market portfolio?
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