a. What is the prediction of the CAPM with respect to the expected return on any security? (1 mark)

b. Why is the variance of a portfolio of internationally diversified stocks likely to be lower than the variance of a portfolio of U.S. stocks? (2 marks)

c. Assuming that the expected euro return on a Dutch equity is 14%, and its volatility is 18%, and the volatility of the dollar/euro exchange rate is 12%, what is the volatility of the dollar return on the Dutch equity if the correlation between the Dutch equitys return in euro and changes in the dollar/euro exchange rate is 0.3? (3 marks)

d. Using the following stock and gold return data for the last year, calculate the return and risk (standard deviation) of a portfolio invested equally in the S&P 500 index and in the gold assets. (4 marks)

Average S&P 500 index return	4%
Average gold return	15%
Volatility () of the S&P 500 index return	27%
Volatility () of the gold return	13%
Correlation of S&P 500 index and gold return	-0.68