2. Determine whether the following statements are true or false and in either case briefly explain why.

(a) Assume the CAPM holds. Two stocks A and B have the same Beta, but stock A has much higher idiosyncratic risk than stock B. This means that stock A must have a higher expected return than B to reward risk-averse investors for holding the additional risk.

(b) Assume that a risk-free asset as well as two risky securities exist in the economy. If the risky securities are perfectly positively correlated with each other, diversifying among the two will not make a greedy risk-averse investor better off. Hint: it may be worth drawing a diagram to clarify your point.