1. What are the advantages of the index model compared to the Markowitz procedure for obtaining an efficiently diversified portfolio? What are its disadvantages? (20 points) 2. What is the basic trade-off when departing from pure indexing in favour of an actively managed portfolio? (20 points) 3. Why do we call alpha a "nonmarket" return premium? Why are high-alpha stocks desirable investments for active portfolio managers? With all other parameters held fixed, what would happen to a portfolio's Sharpe ratio as the alpha of its component securities increased? (20 points) 4. Consider the following two regression lines for stocks A and B in the following figure: (40 Points) - a. Which stock has higher firm-specific risk? - b. Which stock has greater systematic (market) risk? - c. Which stock has higher R2 ? - d. Which stock has higher alpha? - e. Which stock has higher correlation with the market