1. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset...

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1. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. What percentage of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%?

2. An investor is considering two portfolios (Portfolio 1 and 2). Both possible portfolios consist of a 50% weight on Asset A: this asset has an expected return of 12% and a standard deviation of 18%. The other half of Portfolio 1 consists of Asset B: it has an expected return of 8% and a standard deviation of 10%. The other half of Portfolio 2 consists of Asset C: it has an expected return of 8% and a standard deviation of 14%. Can we say that the standard deviation of Portfolio 1 is smaller than the standard deviation of Portfolio 2?

3. Evaluate whether you think the following claim is true or false: One of the most important drivers of changes in the relative price of Royal Dutch versus Shell was the uncertainty over the fundamental value of the firms.

4. Evaluate whether you think the claimed conclusion of following scenario is true or false: A friend of yours is convinced that she has an edge over the market when it comes to picking stocks. She proudly claims that her portfolio of stocks has had a higher return than the market every year for the last three years. Therefore the market does not know how to value stocks correctly. In other words, the stock market must be inefficient.

5. An assumption of CAPM is that investors do not face transaction costs. In particular, CAPM assumes that markets are liquid in the sense that you can always trade any number of shares you would like to any time. In reality, the overall market may become more illiquid in certain times and less illiquid in other times. When the market is illiquid, investors are more hindered from trading by frictions in the market. Suppose that the price of a certain security tends to go up when the overall market becomes more illiquid. Would you expect this security to have a higher or lower expected return than what the CAPM predicts?