1.The potential benefits of diversification into a two-asset portfolio are greatest if:

A.None of the answers is correct.

B.The degree of correlation does not matter.

C.The assets are highly positively correlated with each other.

D.The assets are negatively correlated with each other.

E.The assets are uncorrelated with each other.

2.Which of the following is NOT correct?

A.The part of the risk of a security that can be eliminated by diversifying is its market or systematic risk.

B.The part of the risk of a security that can be eliminated by diversifying is its non-systematic, unique, or firm-specific risk.

C.All of the responses are correct.

D.The more assets in a portfolio, generally, the lower the risk of the portfolio will be.

3.Of these alternatives, which is the best way to use historical data to estimate the expected return for investing in the stock market?

A.The current Treasury bill rate plus a long run average risk premium for investing in the stock market.

B.A long-run average Treasury bill rate plus a long-run average risk premium for stock market investing.

C.An average of a few years of recent stock market returns.

D.A long-run average of historical stock market returns.

E.The current Treasury bill rate plus an average risk premium for stock market investing in recent years.