Problem 1: Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%.
1) Calculate the beta of a firm that goes up on average by 43% when the market goes up and goes down by 17% when the market goes down.
2) Calculate the beta of a firm that goes up on average by 18% when the market goes down and goes down by 22% when the market goes up.
3) Calculate the beta of a firm that is expected to go up by 4% independently of the market.
Problem 2: Suppose the market risk premium is 6.5% and the risk free interest rate is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2.