Answer the True and False questions following each Picture. Circle + for True and 0 for false.

+ 0 7. The (rm rf) in the formula represents the extent to which the returns on a given stock move with the stock market.

+ 0 8. The represents the systematic risk that can be diversified away.

Required Rate of Return (%) SML: TPRF+ (rm-TRE) High = 17 Picture 2: CAPM formula and picture "=1A = 11 Relatively Risky Stock's Risk Premium: 12% ra = r4+ Ba (rm-rt) "Low = 8 Safe Stock Risk Premium: 3% Market (Average Stock) Risk Premium: 6% Where: FR = 5 Risk-Free Rate: 5% = Risk Free Rate B. - Beta of the security - Expected Market Return 0 0.5 1.0 1.5 2.0 Risk, Bj