1. If you have infinitely many stocks, diversification across all those stocks would eliminate systematic risk. True/False? 2. In the CAPM framework, any asset that is not on the CML lies on the SML. True/False/Uncertain? 3. In a factor model, the return of a stock in a particular period is related to: (a) factor risk (b) nonfactor risk (c) standard deviation of returns (d) factor risk and nonfactor risk (e) none of the options 4. In a factor model, the expected return of a stock is related to: & (a) factor risk (b) nonfactor risk (e) standard deviation of returns (d) factor risk and nonfactor risk (e) none of the options 5. Provide answers and brief explanations to the following questions: (A) If financial distress is a risk-factor in a miltifactor model, would it have positive, zero or negative risk premium? (b) Discuss the advantages and disadvantages of the multifactor APT relative to the CAPM. (e) Shares of small firms with thinly traded stocks tend to have positive CAPM alpha. Is this a violation of the efficient market hypothesis? 6. Consider the multifactor APT model with two independent systematic risk factors, F and F. The risk premium and volatility of Flare 6% and 20%, respectively. The risk premium and volatility of Fare -4% and 14%, respectively, (a) You hold a well-diversified portfolio that has 1 - 1 and 8 = -0.2. What is the risk premium of your portfolio? (b) What is volatility of your portfolio? (c) Suppone you want to construct a portfolio that has 8 = 0.5 and B= 0. To construct such a portfolio, you need to invest 50% of your money in factor 1 and 50% in factor 2 True/Falsc/Uncertain