1. In 2000, the S&P 500 Index earned 29.1 percent while the T-bill yield was 5.9 percent. Does this mean the market risk premium was negative? Explain.

2. Consider that you have three stocks in your portfolio and wish to add a fourth. You want to know if the fourth stock will make the portfolio riskier or less risky. Compare and contrast how this would be assessed using standard deviation versus market risk (beta) as the measure of risk.

3. Determine what level of market efficiency each event is consistent with the following:

a. Immediately after an earnings announcement the stock price jumps and then stays at the new level.

b. The CEO buys 50,000 shares of his company and the stock price does not change.

c. The stock price immediately jumps when a stock split is announced, but then retraces half of the gain over the next day.

d. An investor analyzes company quarterly and annual balance sheets and income statements looking for undervalued stocks. The investor earns about the same return as the S&P 500 Index.