TRUE, FALSE, OR UNCERTAIN (EXPLAIN YOUR ANSWER)

1. On February 1, 2020, a product liability suit was filed against Acme Manufacturing Inc., a publicly traded corporation, in the New York state court. The lawsuit was (i) a surprise to the market and (ii) a purely idiosyncratic risk for Acme. On April 1, 2012, the court issued a judgment in favor of the plaintiff. If CAPM theory is true, the filing of the lawsuit on February 1, 2020 should have had no effect on Acmes stock price on that date. Similarly, the issuance of the judgment on April 1, 2020 should have had no effect on Acmes stock price on that date.

2. Jane is deciding how to allocate her retirement funds. Her financial advisor has presented three options: (i) Google stock, (ii) shares of Fund ABC, a well-diversified mutual fund, and (iii) shares of Fund XYZ, a well-diversified mutual fund. If CAPM theory is true, a. Jane should be indifferent between options (i) and (ii) if Google stock has the same beta as shares of Fund ABC. b. Jane should prefer option (ii) to option (iii) if Fund ABC has a higher beta than Fund XYZ.