1. Which of the following statements is FALSE?
Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.
Because investors are risk averse, they will demand a risk premium to hold unsystematic risk.
Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.
The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.
2. Which of the following statements is FALSE?
When the CAPM assumptions hold, choosing an optimal portfolio is relatively straightforward: it is the combination of the risk-free investment and the market portfolio.
A portfolio's risk premium and volatility are determined by the fraction that is invested in the market.
Graphically, when the tangent line goes through the market portfolio, it is called the security market line (SML).
Because all investors should hold the risky securities in the same proportions as the efficient portfolio, their combined portfolio will also reflect the same proportions as the efficient portfolio.
3. An increase in accounts payable results in:
A. An increase in cash
B. None of the above
C. No change in cash
A decrease in cash