1. Short Answer

A. Investors demand higher expected rates of return from stock with returns that are ____________________ sensitive to fluctuations in the stock market.

B. Consider the following two investment alternatives: First, a risky portfolio that pays a 14% rate of return with a probability of 50% or a 6% rate of return with a probability of 50%. Second, a Treasury bill that pays 1%. The risk premium on the risky investment is __________________.

C. Joyce is a risk-averse investor, but Hopper is a more risk-averse investor than Joyce. For the same return, Hopper tolerates _______________ risk than Joyce. As a result, on a mean-standard deviation graph that shows Joyces and Hopper's indifference curves, Joyce's indifference curves will have _______________ slopes than Hopper's.

D. Rank the following from lowest (1) average historical standard deviation to highest (4) average historical standard deviation from 1926 to 2010.

_____ I. Small stocks

_____ II. Long-term bonds

_____ III. T-bills

_____ IV. Large stocks

E. Portfolio EL has an expected return of 10% and a volatility of 23%. Portfolio DOE has an expected return of 12.5% and a volatility of 21%. Portfolio NME has an expected return of 15% and a volatility of 25%. According to the mean-variance criteria, Portfolio ____________________ dominates Portfolio ____________________.

F. For a given expected cash flow, portfolios that command greater risk premia must sell at ____________________ prices.

G. The Duffer Brothers (TDC) stock has a correlation with the market of 0.4. The standard deviation of the market is 20% and the standard deviation of TDC is 30%. TDC's beta is ____________________.