NUMBER 1

(a)

The liquidity risk associated with real assets (like homes) is generally lower than the liquidity risk associated with common stocks because stocks are not tangible assets.

(b)

The rate of return on stock A over the last three years was 8 percent, 12 percent,and 10 percent. Over the same period, the return on stock B was -5 percent, 12 percent, and 9 percent. Stock B had a higher level of absolute risk and a higher average return as compared to stock A over the last three years.

(c)

There is a positive relationship between changes in the required rate of return and changes in the value of financial assets.

(d)

An investment with a wide distribution of expected returns will have a low standard deviation.

(e)

Suppose that the expected return for stock Y is 15% and the standard deviations of those returns is 12%. The expected return and standard deviation for stock Z is 22% and 10%, respectively. All risk averse investors would choose stock Z over stock Y if they had to pick one to hold in isolation.

(f)

O True False