1. Define and discuss the volatility and return characteristics of large stocks versus large stocks and bonds and what affects they have on pricing risk? Give examples to support your answer.
2. Why, in an efficient capital market, does the cost of capital depend on systematic risk rather than diversifiable risk? Explain your answer using an example from the text.
3. What is an expected return and why must it equal a required return? In what circumstances are these two important?
4. What are the three main assumptions of the CAPM and what are their effects on a portfolio. Give examples of your explanation.
5. Define and contrast idiosyncratic and systematic risk and the risk premium required for taking each on. Can beta be helpful in this instance? Explain your answer.
6. Define the following terms and explain how they affect one another. More specifically, for what purposes are they used and how do they relate to one another: efficient portfolio, individual investor, short selling, Sharpe ratio, beta and CAPM.