1. Suppose investors believe that the standard deviation of the market-index portfolio has increased by 50%. What does the CAPM imply about the effect of this change on the required rate of return on Google's investment projects?
2. Consider the statement: "If we can identify a portfolio that beats the S&P 500 Index portfolio, then we should reject the single-index CAPM." Do you agree or disagree? Explain.
3. Are the following true or false? Explain.
- Stocks with a beta of zero offer an expected rate of return of zero.
- The CAPM implies that investors require a higher return to hold highly volatile securities.
- You can construct a portfolio with beta of .75 by investing .75 of the investment bud- get in T-bills and the remainder in the market portfolio.
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