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Question 1 the relevant risk variable is the security’s systematic risk - its covariance of return with all other risky assets in the market. This risk cannot be eliminated. The unsystematic risk is not relevant because it can be eliminated through diversification - for instance, when you hold a large number of securities, the poor m an age me nt cap ab il ity, etc ., o f so me c om pan ie s wi ll be o ffs et b y t he a bo ve a ver ag e capability of others. Question2 both show tradeoff between risk and expected return ， difference : CML measure the risk by standard deviation which consist systematic and unsystematic risk whereas SML only takes systematic risk into consideration. CMLis used for a portfolio of assets whereas SML is used for individual assets as well as portfolios Question4 Assets and those relative weights included in the market portfolio The market portfolio contains all the variable assets those are risky. Question 5 Stock u: 0.1+0.4*0.85=0.134 Stock n: 0.1+0.4*1.25=0.150 Stock d: 0.1+0.4*-0.2=0.92 Question 6 The CAPM formula is used to calculate the expected return on investable asset. It is based on the premise that investors have assumptions of systematic risk (also known as market risk or nondiversifiable risk) and need to be compensated for it in the form of a risk premium – an amount of market return greater than the risk-free rate. By investing in a security, investors want a higher return for taking on additional risk. And the APT allows investors to quantify the expected return on an investment given the investment risk, risk-free rate of return, expected market return, and the beta of an asset or portfolio. The risk-free rate of return that is used is typically the federal funds rate or the 10-year government bond yield. Question 7 The additional risk factors that should be considered along with Beta to estimate expected return are the size of the firm and P/E ratio. The size of the firm and the P/E ratio has an inverse effect on the returns of the stock. This can be explained as the investors put in their money in the stocksof smaller firms then they take more risk. The investors expect that the more risk they take, the more returns they should be earning. The company should pay them higher returns for the risk undertake by them.

Week5 Question1 Efficient market hypothesis (EMH) states that a market is efficient if security prices immediately and fully reflect all available relevant information. Weak form asserts that stock prices already reflect all information that can be derived by examining market trading data such as the history of past prices and trading volume. Semi-strong form says that a firm's stock price already reflects all publicly available information about a firm's prospects. Examples of publicly available information are annual reports of companies and investment advisory data. Strong form of the EMH holds that current market prices reflect all information, whether publicly available or privately held, that is relevant to the firm. Question2 The foremost being that there are a large number of independent, profit-maximizing investors engaged in the analysis and valuation of securities. A second assumption is that new information comes t o t h e m a r k e t i n a r a n do m f as h i o n . T h e t h i r d a s s u m p t i o n i s t h a t t h e n u m e r o u s p r o f it - maximizing investors will adjust security prices rapidly to reflect this new information Question3 The weak-form efficient market hypothesis contends that current stock prices reflect all available security-market information including the historical sequence of prices, price changes, and any volume information. The implication is that there should be no relationship between past price changes and future price changes. Therefore, any trading rule that uses past market data alone should be of little value. Question4 Technical analysis in the form of charting involves the search of recurrent and predictable patterns in stock prices to enhance returns. The EMH implies that this type of technical analysis is without value. Question5 Fundamental analysis uses earnings and dividend prospects of the firm, expectations of future interest rates, and risk evaluation of the firm to determine proper stock prices Question6 The most important responsibility is to identify the risk/return objectives for a portfolio given the investor’s constraints. In an efficient market, portfolio managers are responsible for tailoring the portfolio to meet the investor’s needs, rather than to beat the market, which requires identifying the client’s return requirements and risk tolerance. Question8 The goal is to track the performance of an underlying index in a particular market. The index may be representative of the market as a whole or of a subsector or industry...