1. Consider a stock at time 0 that pays a random dividend cash flow c at time 1 followed by a random terminal dividend c at time 2 and then is done. Adapt the formula Cj,t + Et(Cj,t+1+Pj,t+1) * MDF j,t - 1 rj,t = ' Et1[Cj,t + Et(Cj,t+1+P j,t+1) * MDF j,t] * MDF j,j-1 from the "Asset Pricing" lecture slides for this 3-date stock and use the definition of the autocovariance cov(r, r) of returns at times 1 and 2 to show that if the market forms cash-flow expectations rationally, that then autocorrelation in the dividends alone cannot cause autocorrelation in stock returns between times 1 and 2. Intuitively, then, how could returns be autocorrelated in a market with rational cash flow expectations? Hint: Question 1 only requires 3 or so lines of algebra tops. Don't spend hours on this question if you don't get it quickly. Just give it a good try.