16. The standard deviation of the market-index portfolio is 20%. Stock A has a beta of 1.5 and a residual standard deviation of 30%. What would make for a larger increase in the stock's variance: an increase of .15 in its beta or an increase of 3% (from 30% to 33%) in its residual standard deviation? (a) increase in beta (b) increase in SD (c)Both changes lead to same increase

17. Diversification benefits accrue to a portfolio if the correlation between assets in the portfolio is (a) Less than 1 (b) Greater than 1 (c) Equal to 1 (d) None of the above

18. There are four scenarios with probabilities 0.05, 0.25, 0.4 and 0.3. A stock fund has returns -37, -11, 14, 30 respectively, while a bond fund has returns -9, 15, 8, -5 respectively. The correlation between the two funds is (a) -0.49 (b) 0.49 (c) 0.89 (d) -0.89

19. Security A has an expected return of 12% and a beta of 1.20. Security B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk free rate is 5%. If CAPM is the relevant pricing model, which security would you consider a better buy? (a) A (b) B (c) Indifferent between A and B (d) None of the above

20. If a market is efficient, then the best trading strategy is to (a) trade actively (b) trade passively (c) no trade