1. Stock X was just added to the Dow 30 Index. Prior to the addition, the correlation between the daily returns of X and the other 29 stocks in the Index was +0.40. How do you expect the daily return correlation to change after X is added to the Dow 30 Index? Explain. (two or three sentences)

2. when investor sentiment is unusually low, subsequent returns over the next year on small, unprofitable, non-dividend paying stocks are on average relatively_________. (Fill in the blank with high or low and give a discussion of why this pattern occurs.)
3. Suppose that managers of XYZ think their firms shares are currently overvalued and suppose that their sole objective is to maximize value for their ongoing, long-term share-holders.
   1. Assume that managers of XYZ decide to raise some capital through either (a) equity or (b) debt. Which will they prefer? Why?
   2. Under policy (a) in part (a), how would new shareholders be affected in the long-run? Discuss some empirical evidence that is consistent with your prediction (by empirical evidence, I mean some historical evidence based on data - the relevant evidence has been discussed in class and can be found in the slides).
   3. Now assume that managers of XYZ can invest the new capital in either (a) cash or (b) the typical assets of their firm. Which will they prefer? Why?