1.The term excess return refers to ______________.

a. returns earned illegally by means of insider trading

b. the difference between the rate of return earned and the risk-free rate

c. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk

d. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

2.The values of beta coefficients of securities are __________.

a. always positive

b. always negative

c. always between positive 1 and negative 1

d. usually positive but are not restricted in any particular way

3.A security's beta coefficient will be negative if ____________.

a. its returns are negatively correlated with market-index returns

b. its returns are positively correlated with market-index returns

c. its stock price has historically been very stable

d. market demand for the firm's shares is very low

4.Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?

a. Market risk

b. Nondiversifiable risk

c. Systematic risk

d. Unique risk

5.

Are the following statements true or false?

a.

Stocks with a beta of zero offer an expected rate of return of zero.

	True
	False

b.

The CAPM implies that investors require a higher return to hold highly volatile securities.

	True
	False

c.

You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio.

	True
	False