Suppose that in the coming year, you expect Chilli’s stock to have a volatility of 42% and a beta of 0.9, and Miso’s stock to have a volatility of 24% and a beta of 1.1. The risk-free interest rate is 4% and the market’s expected return is 12%. Which of the following statements is FALSE?
I. Miso has the lowest systematic risk since it has lower volatility and the cost of capital for a project with the same beta as Miso’s stock is closest to 12.8%
II. Chilli has the highest total risk since it has higher volatility and the cost of capital for a project with the same beta as Chilli’s stock is closest to 11.2%
III. Chilli has the lowest total risk since it has a lower beta and the cost of capital for a project with the same beta as Chilli’s stock is closest to 14.8%
IV. Miso has the highest systematic risk since it has a higher beta and the cost of capital for a project with the same beta as Miso’s stock is closest to 13.24%.
a. I and II only
b. III and IV only
c. I, III and IV only
d. I, II, III and IV
