1) Which of the following statements is false?

A) There is an economic reason why firm's betas might varythe firm itself varies.

B) Only a few years of data are required to estimate risk premiums, since both risk premiums and betas remain stable over time.

C) When firms make new investments in new areas or shut down unprofitable projects in old areas their risk profiles change as well.

D) Calculating the cost of capital using multifactor models like the FFC factor specification or the CAPM relies on accurate estimates of risk premiums and betas.

Answer:

Explanation:

2) The market portfolio can be inefficient only if a significant number of investors either.

Answer:

3) Rational expectations means that

A) Investors make their decisions based on rules of thumb.

B) Investors know the upcoming systematic risk facing the market.

C) Investors use only their information in make their investment choices.

D) Investors use both their own information as well as the information they infer from market prices.

Answer: