1. The change from a straight to a kinked capital allocation line might be a result of which of the following? A. Increase in the proportion of the risk-free assets in the portfolio B. Borrowing rate no longer equals lending rate C. The investor's risk tolerance decreases Increase in the riskfree rate E. None of the above statements are correct D 2. The market index model is valid. Matthews Corporation has a beta of 1.2. The annualized market retum yesterday was 13%, and the risk-free rate is currently 5% per year. You observe that Matthews had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that good news about Matthews was announced yesterday. B. bad news about Matthews was announced yesterday. no news about Matthews was announced yesterday. the market interest rate rose yesterday. E. the market interest rate fell yesterday. C. D. 3. Which of the following does NOT contradict the semi-strong form of the efficient market theory? A. Low PE stocks tend to have positive abnormal returns. B. A mutual fund has outperformed the market for each of the last 3 years. C. Purchasing stocks that have announced increased earnings in previous quarter cars positive abnormal retums. D. Stocks that perform well in one month tend to perform poorly in the following month. E High book-to-market stocks tend to earn higher abnormal retums than low book- to-market stocks. E 4. The covariance of asset with the market is 0.06, the standard deviation of the market return is 0.2, and the standard deviation of asset j's return is 0.8. Provided that the market is the source of undiversifiable risk, which fraction of asset j's variance is undiversifiable? Which of the choices below is closest to your answer? A. 10% B. 86% D. 38% 2 of 13 E. 62% 14% C