TRUE OR FALSE

1. Since finance is so concerned with the future, risk in finance is fundamentally about us not knowing exactly what will happen in the future.

2. The reason there is a direct relationship between risk and return is that the vast majority of people are risk averse (they don't like risk). Therefore they want and expect higher returns for engaging in riskier activities or making riskier investments.

3. All else equal, riskier assets will have lower prices than safer investments.

4. All else equal, riskier investments will have lower expected returns than safer investments.

5. One way to identify riskier assets from safer ones is that the riskier investments will have greater dispersion of returns than the safer ones (the risky asset will have higher high returns and lower low returns than the safer ones).

6. One basic principle of finance is that risk, by itself, is neither good nor bad. We can only make a "value" judgment about the risk of an asset after evaluating both the risk and the return. High risk may be "good" if it is accompanied by high enough return.

7. Absolute risk measures are concerned entirely with the risk of an asset, while relative risk measures compare an asset's risk to something else (either to a return or to the risk of another asset).

8. Diversification theory tells us that a large portion of an asset's risk "disappears" when it is held in a portfolio. So, well diversified investors should only be concerned with the risk that remains after diversification, not the beginning level of risk.

9. The Security Market Line (SML) shows the relationship between a stock's standard deviation and its required return.