1. Define the following terms:

a. Risk

b. Probability distribution

c. Standard deviation

d. Required rate of return

e. Coefficient of variation

f. Efficient portfolio

g. Efficient frontier

h. Capital market line

i. Beta coefficient

j. CAPM

k. Correlation coefficient

l. Portfolio

m. Characteristic line

n. Security market line

o. Covariance

p. Systematic risk

q. Unsystematic risk

2. If the returns from a security were known with certainty, what shape would the probability distribution of returns graph have?

3. What is the nature of the risk associated with "risk-free" U.S. government bonds?

4. If inflation expectations increase, what would you expect to happen to the returns required by investors in bonds? What would happen to bond prices?