1. Which of the following is true if you are told that the return on small company stocks is expected to be 16%, and that reflects a risk premium of 12%:

a. Corporate bonds are going to return 4%

b. Large company stocks are expected to return 4%

c. Treasury bills are going to return 4%

d. Government bonds are going to return 4%

e. None of these choices

2. Assume positive annual returns over several years. Which of the following is true?

a. When compounding exists, the Arithmetic average and Geometric average return will be equal

b. The Geometric average return is less than the Arithmetic average return

c. The Arithmetic average return reflects compounding from year to year

d. The Geometric average return is the same as the firm's WACC