Makes only systematic risk affect expected returns

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Reference no: EM132001395

1. Why does only systematic risk exposure only matter for the risk premium ie. what is the mechanism that makes only systematic risk affect expected returns?

2. When calculating the cost of debt, why do we calculate it as the weighted average YTM of all bonds of all maturities? Why do we not just use the YTM for 10 or 20-year bonds?

3. If investors can undo corporate leverage by using homemade unlevering (and thus reduce the risk of their stock investment back to the risk of an unlevered firm), why does the cost of equity increase with leverage?

Reference no: EM132001395

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