1. Suppose asset A and B has same expected return but asset A has higher volatility than B. When combined with asset C, portfolio A+C and B+C has the same expected return but A+C has lower volatility. Suppose you are holding asset C, which one should you include in your portfolio?

Choose the best answer below:

(i) A

(ii) B

(iii) C

(iV) Either A or B

2. Assume that a firm is using the residual dividend policy. The firm’s capital budget is $112.5 million. The optimal capital structure is 20% debt and 80% equity. The firm’s forecasted income is $140 million. If the firm has 50 million shares, what is the dividend per share the firm should pay?

A. The firm should pay no dividends

B. $1 per share

C. $2 per share

D. $3 per share