Problem 1: Suppose the market portfolio has an expected return of 10% and a volatility of 20%, while Microsofts stock has 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 Microsofts equity cost of capital to be equal to 10%?
Problem 2: Suppose Best Buy stock is trading for $40 per share for a total market cap of $16 billion and Walt Disney has 1.8 billion shares outstanding. If you hold the market portfolio, and as part of it hold 100 shares of Best Buy, how many shares of Walt Disney do you hold?
Problem 3: Go to Chapter Resources on MyFinanceLab and use the data in the spreadsheet provided to estimate the beta of Nike and Dell stock based on their monthly returns from 2004-2008. (Hint: You can use the intercept () function in Excel.)
Problem 4: You are trading in a market in which there are a few highly skilled traders who are better informed than you are. There are no transaction costs. Each day you randomly choose five stocks to buy and five stocks to sell (by, perhaps, throwing darts at a dartboard.).
a. Over the long run will your strategy outperform, underperform, or have the same return as a buy and hold strategy of investing in the market portfolio?
b. Would you answer to part (a) change if all traders in the market were equally well informed and were equally skilled?