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Please advise how to set up these problems in Excel. I am unsure of the Excel functions required to solve the equations for equity cost of capital.

12-2. Suppose the market portfolio has an expected return of 10% and a volatility of 20%, while Microsoftâ??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%?
b. What would have to be true for Microsoft's equity cost of capital to be equal to 10%?
12-5. Suppose all possible investment opportunities in the world are limited to the five stocks listed in the table below. What does the market portfolio consist of (what are the portfolio weights)?

Using the above data, 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?
13-2. Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks:

a. At current market prices, which stocks represent buying opportunities?
b. On which stocks should you put a sell order in
Hint: calculate the returns using CAPM, campare them with the expected returns here, get the alphas.

13-8. Why does the CAPM imply that investors should trade very rarely?

 

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