1. According to Yahoo! Finance, the common stock of Dendreon, a biotechnology company headquartered in Seattle, has a beta of 2.92. The standard deviation of its monthly stock return is 33.3%. The common stock of Petsmart has a beta of 0.38, and the standard deviation of its monthly stock return is 8.6%. In order: Which stock has more systematic, or market, risk? Which stock has more stand-alone risk?

a. Dendreon, Dendreon

b. Dendreon, Petsmart

c. Petsmart, Petsmart

d. Petsmart, Dendreon

2. It is common sense that diversification is a way to decrease risk because it means that you avoid putting all your eggs into one basket. But why is diversification important for understanding the kind of risk that matters to most investors?

a. Because of diversification, assets returns are not correlated.

b. Diversification implies that exposure to market-wide risk is not important to most investors.

c. Because of diversification, investors can diversify away all risk.

d. Because of diversification, the risk that matters is covariance risk, not stand-alone risk.

3.Which of the following is the best statement of the efficient markets hypothesis?

a. Because of competition among investors, information gets incorporated quickly into share prices, and share prices are unbiased measures of fundamental value.

b. Investors with information that a stock has positive net present value (NPV) will buy it, while investors with information that a stock has negative net present value (NPV) will sell it.

c. If investors are rational and have the same information, share prices will reflect all available information.

d. Investors valuations require accurate information about a firm's cash flows and accurate predictions of future cash flows.