Question: Question 9 (6 points) Short Question 3 (6 points) Provide clear and concise answer to the following question. [150 words limit, approximately 10 lines at

Question 9 (6 points) Short Question 3 (6 points)

Provide clear and concise answer to the following question. [150 words limit, approximately 10 lines at 12pt. in a standard size sheet.]

Solo is a publicly traded firm that operates in a single industry. An equity analyst has issued a company report arguing the following: Solos cost of capital is higher than what the CAPM indicates. The reason is that the CAPM assumes that firms are well-diversified and therefore, are only exposed to systematic risk. However, since Solo is not well diversified, one cannot disregard the idiosyncratic risk when computing its cost of capital. Do you agree with the consultant? Explain your answer.

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