QUESTION 1,,In a free economy, capital from providers with available funds is allocated through the price system to users that have a demand for funds. The interaction of the providers’ supply and the users’ demand determines the cost (or price) of money, which is the rate users pay to providers. For debt, we call this price the interest rate. For equity, it is called the cost of equity, and it consists of the dividends and capital gains stockholders expect.,,Discuss the FOUR factors affecting the cost of money.,[20 marks],QUESTION 2,Stock A and B have the following historical returns:,Year Stock A’s Returns (%) Stock B’s Returns (%),2004 -18.00 -14.50,2005 33.00 21.80,2006 15.00 30.50,2007 0.50 -7.60,2008 27.00 26.30,,a) Calculate the average rate of return for each stock during the 5-year period.,b) Assume that you held the portfolio consisting of 50% stock A and 50% stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period?,c) Calculate the standard deviation of returns for each stock and for the portfolio.,,d) Calculate the coefficient variation for each stock and for the portfolio. ,,e) Choose the best stock and explain your answer. , [30 marks],,
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