Does random diversification increase or decrease the variance of a portfolio? What role do events play in the actual return of a portfolio? Is this statement true – “if the event is expected, it is already reflected in the stock price”? Explain. What risk can be diversified away? Beta measures what form of risk? If you have a three stock portfolio and all three stock have betas of 2.0 or more what is the beta of the portfolio? Less than 1, between 1 and 1.99 --- or 2 or more? What do companies use the weighted average cost of capital for? For the same corporation, is a weighted average cost of capital of 8.5% better or worse than a 9.5%? For any corporation, what is the most costly form of capital for that corporation? Debt or Equity. What does beta measure? Is a beta of 2.0 or 1.7 more risky?

2.XYZ Company has a low risk division and a high risk division. If XYZ Company does not use a divisional cost of capital, which division will get the most funding?