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  1. Define and discuss the volatility and return characteristics of large stocks versus large stocks and bonds and what affects they have on pricing risk? Give examples to support your answer.

 

  1. Why in an efficient capital market, does the cost of capital depend on systematic risk rather than diversifiable risk. Explain your answer using an example from the text.

 

  1. What is an expected return and why must it equal a required return? In what circumstances are these two important?

 

  1. What are the three main assumptions of the CAPM and what are their effects on a portfolio. Give examples of your explanation.