True or False, if False, why? 1. The value of a European put option increases if the risk-free rate r decreases.

2. A put option offers the purchaser limited downside gain.

3. A European call option always has non-negative values to the holders.

4. When a dividend is paid, the put option decreases, call increases.

5. The certainty equivalent of a lottery payoff for a risk-averse individual is always higher than the expected payoff.

6. According to APT models, there is a risk premium for not only systematic risk, but also for unsystematic risk, as many factors contribute to determining risk premiums.

7. An exponential utility function exhibits increasing ARA and increasing RRA.

8. A person with a linear utility function is risk averse.

9. A risk averse individual is likely to have a convex utility function.

10. The Capital Asset Pricing Model measures relevant risk of a security and shows the relationship between risk and expected return.

11. The Capital Asset Pricing Model implies that all risky assets must have a positive risk premium.

12. According to the Capital Asset Pricing Model, securities with positive alphas are considered as overpriced.

13. The portfolio beta is calculated as the sum of the weighted average of the betas of each investment in the portfolio.

14. An efficient portfolio can contain assets which themselves do not lie on the efficient frontier.

15. Diversification cannot work if all stocks contained in the portfolio have identical amount of risks.

16. Increasing absolute risk aversion implies increasing relative risk aversion.

17. If we have a bond and an option and we can model their future values, we can also determine the price of any other asset that has payoffs in those states of the world. 2

18. Assume we are short one stock and want to hedge buy trading in a call option with a delta of 0.5. We need to buy 0.5 options.

19. The portfolio diversification effect requires that at least some assets are negatively correlated.

20. It is possible for the risk/return profile of individual assets to lie outside (i.e. left of) the efficient frontier.

21. Risk averse investors tend to have lower marginal utility when their consumptions are low.

22. A risk averse individual that has to decide between two different lotteries will always prefer a lottery with less risk.

23. Fama and French, in their 1992 study, found that firm size had better explanatory power than beta in describing portfolio returns.

24. The option price, follows a martingale under the risk-neutral measure Q when interest rate is zero.