Stock Price/Share ($) Number of shares outstanding (millions)
A 10 10
B 20 12
C 8 3
D 50 1
E 45 20
1) Using the 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 you need to make to maintain a market portfolio?
2) Suppose the market portfolio has and expected return of 10% and a volatility of 20%, while Microsoft's stock has a volatility 30%.
a) Given its higher volatility, should we expect Microsoft to have and equity cost of capital that is higher that 10%?
b) What would have to be true for Microsoft's equity cost of capital to be equal to 10%?