a) The CAPM implies that rational investors should hold the market portfolio together with the risk-free asset. As the market portfolio has a beta of 1, an equally good alternative would be for investors to hold instead just one stock in a large, public company with a beta of exactly 1. True or false? Briefly explain your answer. (5 marks) b) It is not possible to forecast stock returns in an efficient market. True or false? Briefly explain your answer. (3 marks) c) Consider a well-diversified Portfolio A in a two-factor economy. The risk-free rate is 5%, the risk premium on the first factor portfolio is 4% and the risk premium on the second factor portfolio is 6%. If Portfolio A has a beta of 1.5 on the first factor and 1.1 on the second factor, what is its expected return based on APT? (4 marks) d) Steve is more risk-averse than Eddie. Plot their indifference curves on a risk-return graph. [Hint: Will their curves intersect?] (4 marks)

a) The CAPM implies that rational investors should hold the market portfolio together with the risk-free asset. As the market portfolio has a beta of 1, an equally good alternative would be for investors to hold instead just one stock in a large, public company with a beta of exactly 1. True or false? Briefly explain your answer. (5 marks) b) It is not possible to forecast stock returns in an efficient market. True or false? Briefly explain your answer. (3 marks) c) Consider a well-diversified Portfolio A in a two-factor economy. The risk-free rate is 5%, the risk premium on the first factor portfolio is 4% and the risk premium on the second factor portfolio is 6%. If Portfolio A has a beta of 1.5 on the first factor and 1.1 on the second factor, what is its expected return based on APT? (4 marks) d) Steve is more risk-averse than Eddie. Plot their indifference curves on a risk-return graph. [Hint: Will their curves intersect?] (4 marks)