1. Asset 1 has a beta of 1.2 and Asset 2 has a beta of 0.6. Which of the following statements is correct?

A. Asset 1 is more volatile than Asset 2.

B. Asset 1 has a higher expected return than Asset 2.

C. In a regression with individual assets return as the dependent variable and the markets return as the independent variable, the R-squared value is higher for Asset 1 than it is for Asset 2.

D. All of the above statements are correct.

2. An underpriced stock provides an expected return which is ________ the required return based on the capital asset pricing model (CAPM).

A. less than

B. equal to

C. greater than

D. greater than or equal to

3. Adding a security that has a low correlation to an existing portfolio will:

A. lower the overall variability of the portfolio

B. increase the overall variability of the portfolio

C. make the portfolio more risky

D. ensure the portfolio achieves a good rate of return

4. The market portfolio is:

A. a completely diversified portfolio, which means that most of the risk unique to individual assets in the portfolio is diversified away

B. a portfolio in which both systematic and unsystematic risk has been diversified away

C. the portfolio that all investors invest their funds in

D. a completely diversified portfolio, which means that all the risk unique to individual assets in the portfolio is diversified away