1.Kaui Surf Boards is seeking to raise capital from a large group of investors to expand its operations. Those investors currently hold the S&P 500 index, which has a standard deviation of 18% and expected return of 10%. Kaui Surf Boards is expected to have a standard deviation of 36%, and a 15% correlation with the S&P 500 index.
a) If the risk-free rate is 4%, what is the appropriate cost of equity capital for Kaui Surf Boards?
b) Suppose you hold a portfolio consisting of 5% Kaui Surf Boards and 95% S&P 500 index. Calculate the beta and the expected return of the portfolio.