1. Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.s stock to change price.

a. The government announces that inflation unexpectedly jumped by 2 percent last month.

b. Big Widgets quarterly earnings report, just issued, generally fell in line with analysts expectations.

c. The government reports that economic growth last year was at 3 percent, which generally agreed with most economists forecasts.

d. The directors of Big Widget die in a plane crash.

e. Congress approves changes to the tax code that will increase the top marginal corporate tax rate. The legislation had been debated for the previous six months.

2. Dudley Trudy, CFA, recently met with one of his clients. Trudy typically invests in a master list of 30 securities drawn from several industries. After the meeting concluded, the client made the following statement:

I trust your stock-picking ability and believe that you should invest my funds in your five best ideas. Why invest in 30 companies when you obviously have stronger opinions on a few of them? Trudy plans to respond to his client within the context of modern portfolio theory.

a. Contrast the concepts of systematic and firm-specific risk and give one example of each.

b. Critique the clients suggestion. Discuss the impact of the systematic risk and firm-specific risk on portfolio risk as the number of securities in a portfolio is increased.