True or False, if false explain why.

1. If two risky assets have the same standard deviation, the optimal portfolio of the two risky assets is

a) equally weighted

b) it has a standard deviation that increases with the correlation between the two assets.

2. The yield on a sovereign bond in the euro area

a) should exceed the yield of a safe bond by the expected rate of default loss on the sovereign.

b) therefore it should exceed the yield of a US bond of the same maturity by the expected rate of default loss. If false in general, are there some special cases where this is true?

3. The Gordon growth model

a) describes a stocks price as the present discounted value of its expected dividends in the future. Mention some simplifying assumptions in this model.

b) The Gordon growth model makes a simplifying assumption that, for any given holding period, the stocks return over that period consists only of dividend gains and no capital gains.