1. The market portfolio has an expected return of 11.4 percent and a standard deviation of 21.4 percent. The risk-free rate is 4.4 percent. What is the standard deviation of a well-diversified portfolio with an expected return of 19.4 percent?

2. Suppose that a European call option to buy a share for $40 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Draw a diagram illustrating how the profit from a short position in the option depends on the stock price at maturity of the option.