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Suppose you estimate that stock A has a volatility of 32% and a beta of 1.42, whereas stock B has a volatility of 68% and a beta of 0.75.
(a) Which stock has more total risk?
(b) Which stock has more market risk?
(c) Suppose the risk-free rate is 2% and you estimate the market’s expected return as 10%. Which firm has a higher cost of equity capital?
