2. What is a diversified portfolio? What type of risk is reduced through diversification? How many securities are necessary to achieve this reduction in risk? What characteris-tics must these securities possess?

4.If the expected returns of two stocks are the same but the standard deviations of the returns differ, which security is to be preferred?

6. Indifference curves used in portfolio theory relate risk and return. How is the portfo-lio's risk measured? If one investor's indifference curves are steeper than another inves-tor's, what does that indicate about their respective willingness to bear risk?

8. If the correlation coefficient for a stock and the market equals 0, what is the market risk associated with the stock?

10. How does arbitrage pricing theory advance our understanding of security returns?

RELATIONSHIPS AND ILLUSTRATED FUNDAMENTAL PROBLEMS RELATIONSHIPS

1. An increase in expected returns implies __________ in expected income or __________ in capital gains.

2. An increase in the number of securities in a portfolio __________ systematic risk.

3. Unsystematic risk __________ as a portfolio becomes more diversified