1-Why does diversification reduce risk?
2-Calculate the nominal and real returns for the following corporate bond investment: Purchased for $840 one year ago, 4% coupon rate, sold for $894. The inflation rate was 5.0% during the year. Would you consider this an appropriate investment if Treasury bills had yielded 6.0% over the same period?
3-Explain in words what beta is and why it is an important tool of security valuation.
4-The stock of Newmont Mining, the world’s largest gold producer, has above-average volatility but relatively low beta. Why?
5-Why is it important to make the distinction between company opportunity cost of capital and project opportunity cost of capital when evaluating projects?
6-Explain why an insurance company is willing to sell life insurance to individuals, but will be more reluctant to issue policies insuring against earthquake damage to residents living along fault lines. Why don’t insurance companies simply charge the residents a premium that reflects the actuarial probability of damage from earthquakes?
7-Calculate the expected return, variance, and standard deviation for the following portfolio of four stocks, equally weighted:
8-Calculate the expected return, variance, and standard deviations for investments in either stock A or stock B, or an equally weighted portfolio of both.