Required:

a. What does an efficient market imply for stock prices? In your answer, make sure that you define efficient markets [1 mark] and identify the implication for stock prices when markets are deemed efficient [1 mark].

b. Researchers have shown that the best measure of risk of a security in a large portfolio is the beta () of the security, which is captured in the Capital Asset Pricing Model (CAPM). In your own words, briefly define Beta [1 mark] and interpret what a securitys Beta of one (1.00) relative to the market implies [1 mark].

c. When a firm announces a dividend cut, it provides signals to investors. Briefly explain one possible positive signal [2 marks] and one possible negative signal [2 marks] that the firm gives when it cuts its dividend.