1. Corporations often distribute profits to their shareholders in the form of dividends, which are simply checks mailed out to shareholders. Suppose that you have the chance to buy a share in a fashion company called Rogue Designs for $35 and that the company will pay dividends of $2 per year on that share every year. What is the annual percentage rate of return? Next, suppose that you and other investors could get a 12 percent per year rate of return by owning the stocks of other very similar fashion companies. If investors only care about rates of return, what should happen to the share price of Rogue Designs? (Hint: This is an arbitrage situation.)

2. Why is it reasonable to ignore diversifiable risk and care only about non-diversifiable risk? What about an investor who puts all of his money into only a single risky stock. Can he properly ignore diversifiable risk?

3. If we compare the betas of various investment opportunities, why do the assets that have the highest betas also have higher average expected rates of return?

4. Consider the Security Market Line (SML). What determines its vertical intercept? What determines its slope? And what will happen to an asset's price if it initially plots onto a point above the SML?