Fundamentals of Corporate Finance Chapter 11 Introduction to Risk, Return, and the Opportunity Cost of Capital Homework.

1) What does financial analysts rely on when researching different investments?

2) What are two well-known market indices? What is the basis for each index?.

3) Do these market indices track a large number of stocks? If not why are they used so much?

4) How is the market risk premium determined for common stocks?

5) Here are the average rates of return for common stocks and Treasury billis for four different periods. What was the risk premium on stock for each of these periods? 1900-1924 1925-1949 1950-1974 1975-2010 Stocks 9.50% 10.20% 11.10% 13.70% Treasury bills 5.10% 1.10% 3.50% 5.60%.

6) What securities do the historical records show bond performances are typically against?

7) What are the two benchmark securities for measuring risk?.

8) Investment risk depends on what?

9) What does the standard deviation represent from the table presented in the notes?

10) Define diversification.

11) What is the difference between specific and market risk? Which risk can be reduced and how can it be reduced? Which risk cannot be greatly reduced? Why?