1. Given the benefits of diversification, should investors broadly diversify their activities? Argue briefly. No calculations needed.

2)Over the last 5 years, the Procter & Gamble stock has earned an annual total return of approximately 12% with volatility 30%. During the same time, the Market Portfolio has earned a return of about 8% with volatility 15%. Procter & Gamble's beta was 0.9 and the risk-free rate was 2% (hence, a market risk premium of about 6%). Should investors have put all their money in the Procter & Gamble stock?

3)Suppose banks earn a return on assets (ROA) of 1% and operate at an equity ratio of 5%, so that their return on equity (ROE) is 0.01/0.05 = 20%. A colleague of yours is concerned that higher equity requirements of, say, 8% will reduce ROE and, therefore, harm shareholders. Is your colleague's concern justified? Explain carefully.

4)Why are well-functioning capital markets an important assumption for the net present value (NPV) rule to work? Explain carefully.

Answer rating: 100% (QA)

1Yes investors should broadly diversify their activities Diversification helps investors to reduce the overall risk of their portfolio by spreading th... View the full answer