1. It was explained that it is better for investors to have part of their money invested in a risk-free asset. Remember that the return (reward) to risk ratio from the new efficiency frontier with the risk-free asset (CML) is better than from the old efficiency frontier with no risk-free asset. Explain why this argument makes financial sense in a risk-return tradeoff context and give an example of a risk-free asset which most of you likely hold. Limit your answers to no more ten sentences.2.If investors become more jittery (more risk-averse) about investing in the stock markets based on new growth fears about the U.S. and global economies then what will happen to current stock prices and expected stock returns according to the predictions of the Capital Asset Pricing Model (CAPM)? Limit your answers to no more twelve sentences3.If you invest your entire capital in a biotechnology sector mutual fund or biotech exchange traded fund (ETF) with 50 biotech stocks in each fund then you would have eliminated all of the company-specific risks and your portfolio will be almost fully diversified. Explain whether or not this is a valid diversification argument according to the discussion in Chapters 6 and 25. Limit your answers to no more ten sentences.4. Also some may describe CAPM in a simple non-technical way that it rewards investors for “waiting and worrying about their investments”. Discuss what CAPM variables may correspond to the waiting part and worrying part of your invested money. Limit your answers to no more twelve sentences.
