Chapter 12: Return, risk and the security market line 1) Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.'s stock to change price. a. The government announces that inflation rose an unexpected 3 percent last month. b. Big Widget's quarterly earnings report, just issued, were in line with analysts' expectations. c. The government reports that economic growth last year was 2 percent. Most economists had forecast a growth rate of 2 percent. d. The highly praised CEO of Big Widget died in an airplane crash. e. Congress approved changes to the tax code that will increase the top marginal corporate tax rate. The legislation had been debated for the previous six months. The result was expected. 2) Trudy Dudley, CFA, recently met with one of her newly retired clients. For such clients, Trudy typically invests in a master list of 30 securities drawn from several industries and a combination of AAA-rated corporate bonds and U.S. Treasury STRIPS. After the meeting concluded, the client made the following statement: "I trust your stock-picking ability and believe that you should invest my funds in your five best stock ideas. Why invest in a combination of 30 stocks and bonds when you obviously have stronger opinions on a few of the stocks that promise far higher returns?" Trudy plans to respond to her client within the context of modern portfolio theory. What should Trudy tell her client