1. Explain whether you agree or disagree with the following statement: A true financial professional should never use the Payback Rule to evaluate a project because the Payback Rule does not account for the riskiness of a project.

2. Briefly explain why we sometimes need to calculate the Effective Annual Cost (EAC) when comparing different projects.

3. A friend of yours tells you that they have been making abnormal profits (more than can be explained by the CAPM or other multi-factor risk models) by reading on-line message boards and investing in the stocks that are recommended there. If true, explain what form(s) of the efficient markets hypothesis this result might violate (if any).

4. You would like to create a portfolio that earns expected annual returns of 6% using the market portfolio and the risk-free security. What positions (weights) in these components would be required to achieve this objective if the market is expected to return 9% and the risk-free rate is 2.5%? Interpret these weights.

5. Assume the risk-free rate is 4.5% and the market risk premium is 7%. If the expected return on Eagle, Inc. stock is 7.5%, what is the beta of Eagle, Inc. stock?

6. Briefly explain why we care about asset return correlations when constructing investment portfolios.

7. Briefly discuss the issues surrounding the mechanisms that firms use to reward shareholdershow do dividends compare to share repurchases?