1) One of the most important implications of our discussion of risk and return is the benefit of:

A) diversification

B) taking certain risks

C) pursuing higher returns

D) reducing risk levels

Answer:

2) Uninformed individuals tend to ________ the precision of their knowledge. In finance, we call this presumptuousness the ________ hypothesis.

A) underestimate; underconfidence

B) overestimate; overconfidence

C) underestimate; overconfidence

D) overestimate; underconfidence

Answer:

3) Investors can ________ without reducing their expected return.

A) take more risk

B) eliminate risk

C) take the same risk

D) reduce risk

Answer:

4) According to the CAPM, investors should hold ________ assets in combination with the market portfolio of all risky securities.

A) more risky

B) risk-free

C) less risky

D) same risk

Answer:

5) Why is the high trading volume observed in markets inconsistent with the CAPM equilibrium?

Answer: