1. A stock has a beta of 1.4, an expected return of 17.2 percent, and lies on the security market line. A risk-free asset is yielding 3.2 percent. You want to create a portfolio that is comprised of the stock and the risk free and will have a portfolio beta of 0.6. What is the expected return on this portfolio?

11.87 percent

12.33 percent

10.41 percent

9.20 percent

2. Diversifying a portfolio across various sectors and industries will tend to:

increase the security's risk premium.

reduce the beta of the portfolio to zero.

increase the required risk premium.

reduce the firm-specific risk.

3. The cost of preferred stock:

is constant over time.

decreases when a firm's tax rate increases.

is unaffected by changes in the price of the stock.

is equal to the preferred stock's dividend yield.