PLEASE SHOW ALL WORK!!

1. Diversification: True or False. Explain your answer.

The variances of the individual assets in the portfolio are the most important characteristic in determining the expected return of a well-diversified portfolio.

2. Portfolio Risk: Explain.

a) If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio?

b) If a portfolio has a positive investment in every asset, what about the portfolio beta? Is the portfolio beta less than that of every asset in the portfolio?

3. Short Questions:

a. What is the beta of a market portfolio?

b. If beta of a stock is one, what you can say about the riskiness of that stock compare?

c. If beta of a stock is greater than one, what you conclude about riskiness of the stock?

d. If the standard deviation of returns of a financial asset is zero, what is your best guess about that financial asset?

4. Discuss the three forms of market efficiency. Explain your point of view on which type of efficiency best represents US capital market.

5. Discuss the key theories in capital structure briefly. Please use complete sentences. No bullets please.