1. A central message of risk and return models in finance is that you will get rewarded only

for risk that cannot be diversified away. Which of the following assumptions do you require to get to this conclusion?

i. That we live in a mean-variance world.

ii. There are no transactions costs.

iii. All investors are diversified.

iv. The marginal investors in companies are diversified.

v. All of the above

2. Many risk and return models in finance are built on the presumption that we live in a mean-variance world. However, you believe that investors value the possibility of big positive payoffs and that you are more likely to get big positive payoffs on small cap companies than big ones. Which of the following would you expect to observe investors doing?

i. Pay more for small cap stocks than for large cap stocks, with the same

expected return and standard deviation.

ii. Pay less for small cap stocks than for large cap stocks, with the same expected

return and standard deviation.

3. You are provided with the following breakdown of stockholders and trading volume in a company: Find out the marginal investor in the company.

Group	% of Stocks Held	% of trading volume
Government	30%	5%
Insiders(Managers)	20%	5%
Domestic Institutions	15%	15%
Foreign Institutions	15%	60%
Individuals	20%	15%

1. Government
2. Insiders(Managers)
3. Domestic Institutions
4. Foreign Institutions
5. Individuals