1. Suppose the standard deviation of a small stock is 20. The standard deviation of a portfolio of small stocks is 16. What explains the difference? Which risk is rewarded by financial markets? 2. Indicate whether each of the following is true or false: 1.) The greater the leverage, the higher the risk to equity holders. 2.) The stability of the dividend-price ratio indicates stocks are a safe asset in long run. 3.) When the dividend-yield is higher than average, future dividends will on average be lower. 4.) Stock market fluctuations are generally too large to be explained by fundamentals. 5.) If I am risk averse, the best advice would be to invest in relatively safe assets whose returns tend to be stable. 3. Using notation used in lecture, give an expression for the mean return for a portfolio of two risky assets. If I want to attain an expected portfolio return of rt, what weight should I put on asset 1, in terms of expected asset returns on each asset and rt. 4. Suppose there are two risky assets with zero correlation. Using standard notation, give an expression for the variance of the portfolio return. 3. Using notation used in lecture, give an expression for the mean return for a portfolio of two risky assets. If I want to attain an expected portfolio return of rt, what weight should I put on asset 1, in terms of expected asset returns on each asset and rt. 4. Suppose there are two risky assets with zero correlation. Using standard notation, give an expression for the variance of the portfolio return. 5. For a portfolio of two risky assets, give an expression for the variance of portfolio's return. Suppose the correlation coefficient is minus 1. What weight must I place on asset 1 to eliminate risk? 6. In the U.S. stock market in recent decades, individual stock returns have become more variable, while correlations across stocks have fallen. Meanwhile, in international markets, returns for each country have maintained the same amount of volatility, while correlations across markets have risen. What are the implications for the gains to diversification? 7. The standard utility function U (rp, 0%) = Erp - 40%, where rp denotes the return on the portfolio, while on denotes the variance of the portfolio return. Suppose I invest a share w in a risky asset with expected return of 5% with standard deviation of 8% and I invest the rest (1 w) in a risk-free asset paying 1%. What is the Sharpe ratio for the risky asset? Determine the optimal value of w in terms of A