1. Which of the following statements is FALSE?

A. When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio.

B. Firms are affected by both systematic and firm-specific risk.

C. Firm specific news is good or bad news about the company itself.

D. The risk premium for a stock is affected by its idiosyncratic risk.

2.Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%. Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down. Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down. Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down. The beta for security "Y" is closest to:

A. 0.25

B. 0.00

C. -1.00

D. -0.25

3.Which of the following statements is FALSE?

A. If we increase the fraction invested in the efficient portfolio beyond 100% we are short selling the risk-free investment.

B.To earn the highest possible expected return for any level of volatility we must find the portfolio that generates the steepest possible line when combined with the risk-free investment.

C.Every investor should invest in the tangent portfolio independent of his or her taste for risk.

D.As we increase the fraction invested in the efficient portfolio, we increase our risk premium but not our risk proportionately.

4.Tom's portfolio consists solely of an investment in Merck stock.Merck has an expected return of 13% and a volatility of 25%.The market portfolio has an expected return of 12% and a volatility of 18%.The risk-free rate is 4%.Assume that the CAPM assumptions hold in the market.

Assuming that Tom wants to maintain the current expected return on his portfolio, then the amount that Tom should invest in the market portfolio to minimize his volatility is closest to:

A. 88.8%

B.100%

C.112.5%

D.125%

5.An equally weighted portfolio consists of 34 assets which all have a standard deviation of 0.305. The average covariance between the assets is 0.026. Compute thestandard deviationof this portfolio. Please enter your answer as a percentage to three decimal places (i.e. 12.345% rather than 0.12345 -- the percent sign is optional).