Use the information provided below to answer questions 1 - 5

John is an analyst at Star Investments, Inc. and is currently working on valuing HomeStore, Inc. which is a home goods retail store. The Beta for Homestore is 1.5 and standard deviation for monthly returns of Homestore is 10%. Expected return on the market is 8% and Treasury bill rate is 3%.

1. Beta captures which one of the following types of risk?

	a.	Systematic risk
	b.	Company Specific risk
	c.	Unsystematic risk
	d.	None of the answers

2.Which of the following is true?

	a.	Investor should be compensated for taking on total risk
	b.	Changes in interest rate is an example of company specific risk
	c.	Risk due to inflation is an example of unsystematic risk
	d.	Capital Asset Pricing Model (CAPM) shows the relationship between expected return and risk

3.Using the data above, compute the expected return for Homestore, Inc.

	a.	15%
	b.	7.5%
	c.	10.5%
	d.	10%

4.Using the data above, compute the Market Risk premium for Homestore, Inc.

	a.	5%
	b.	2%
	c.	-2%
	d.	-5%

5.As part of his analysis, John also computed the beta and the standard deviation of returns for Greenstore, Inc. The beta and standard deviation of returns for Greenstore, Inc. is 2.0 and 8% respectively.

	a.	A rational investor should demand higher return for Homestore, Inc. because it has higher standard deviation of returns
	b.	A rational investor should demand higher return for Greenstore, Inc. because it has higher Beta
	c.	A rational investor should demand higher return for Greenstore, Inc. because it has lower standard deviation
	d.	A rational investor should demand higher return for Homestore, Inc. because it has lower beta.