TF question:

1 Suppose two stocks are perfectly positively correlated. Then a mean-variance investor will be indifferent between these two stocks.

2 When constructing the Minimum Variance Frontier (MVF) with two risky assets, both of the assets lie on the frontier. When constructing the MVF with more than two risky assets, each of the individual assets will also lie on the frontier.

3 Suppose that you use historical data to estimate the inputs for MPT. Because of the measurement error problem, the Sharpe ratio of the true MVE portfolio will be higher than the Sharpe ratio of your estimate of the MVE portfolio.

4. Suppose that you use historical data to estimate the inputs for MPT. Because of the measurement error problem, the expected return of the true MVE portfolio will be higher than the expected return of your estimate of the MVE portfolio.

5.Suppose CAPM holds. The relationship between beta and expected return implied by CAPM holds for both individual stocks and well-diversified portfolios.

6.When estimating beta, it is a good idea to use as much historical data as is available in order to get the most precise esimate of the true beta.

7.According to consumption-based asset pricing, stocks that pay large dividends when the marginal utility is high will have higher expected returns than stocks that pay large dividends when marginal utility is low.

8.Suppose that stock A has a higher standard deviation than stock B and a lower expected return. Then an arbitrage opportunity exists.

9.According to Arbitrage Price Theory (APT), factor portfolios have positive risk premia.

10.APT implies that all traded securities have a risk premium that exhibits a beta-represention, i.e., thatE(Ri)=k=1K{ik}RPk

for all traded securities i.