1. Assume the following:

• interest rate on Treasury securities is 3% (r_RF = 3.0%)_.
• the return on the market is 10% (r_M = 10%).
• the beta of stock I is 1.5. (b_i = 1.5).

What is the required return on stock I?

Group of answer choices

a. 8.0

b. 15.0

c. 19.5

d. 13.5

2. Select the correct statement.

Group of answer choices

a. Diversification allows you to reduce your risk without lowering your return.

b. If risk aversion increases in the stock market, stock prices will increase.

c. When forming a well-diversified large company portfolio like the S&P 500, the standard deviation (of returns) of the portfolio can be reduced to 0.

d. The risk of a stock when it is added to a portfolio is the stock's standard deviation of returns; the risk of a stock when it is your only investment is the stock's beta.

3. If inflation increases, the required rate of return on a stock would _____; if investor risk aversion (the risk of investing in the stock market) increases, the required rate of return on a stock would _____.

Group of answer choices

a. decrease; decrease

b. increase; increase

c. decrease; increase

d. increase; decrease