1. On a futures exchange, to make sure that parties do not default on their obligations under the contract, the exchange will require parties to post sufficient _____________ in the form of a __________________ posted in each account to cover any losses.

2. The difference between the average rate of return on a security or a portfolio of securities and its SML relation is called _____________.

3. True/False. According to the CAPM, an investor with below-average risk aversion will hold more of the risk-free asset.

4. Explain the relationship between the volatility of a stock and the price of the call and put options on that stock (in qualitative terms). Why is this so?

5. A stock has a beta of 2.5, and the return on the market is expected to be 12% and the risk-free rate is 7%. What is the total expected return on the stock under the CAPM? (Please show work)