State True or False

1. Risk premium = Expected return - Risk-free rate

2. The expected return of the portfolio considers the performance of each stock given various economic scenarios.

3. The weights that are commonly used when computing the expected return of a portfolio given various economic scenarios are based on the amount invested in each security held in the portfolio.

4. Diversification works because firm-specific risk can be dramatically reduced if not eliminated.

5. A firm in Moose Jaw announces a revolutionary way to make auto airbags in a way that decreases their risk to automobile occupants. This is a type of surprise that would be characterized as unsystematic risk.