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1) Why is it so common to use historical financial data to estimate future market betas? 2) Assume that you have invested half of your

1) Why is it so common to use historical financial data to estimate future market betas?

2) Assume that you have invested half of your wealth in a risk-free asset A and half in a risky portfolio B. Is it theoretically possible to lower your portfolio risk if you move your risk-free asset holdings (A) into another risky portfolio C? In other words, can you ever reduce your risk more by buying a risky security than by buying a risk-free asset?

3) Describe the key assumptions underlying the Capital Asset Pricing Model (CAPM).

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