Finance which of the following statements on consumption-based asset pricing are correct? 1. The power utility model predicts that the variance of consumption growth is positively related to the risk-free rate. 2. Assets that perform well when marginal utility is high should earn lower expected returns. 3. In the data, consumption growth is smooth with low standard deviation relative to stock returns. 4. In the data, the sharpe ratio of the market portfolio is about 50% per year. This implies the standard deviation of any valid stochastic discount factor that can explain the equity risk premium puzzle must be less than 50%

1. Which of the following statements is FALSE? A) When an investment is risky, there are different returns it may earn. B) In finance, the variance of a return is also referred to as its volatility. C) The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities. D) The variance is a measure of how "spread out" the distribution of the return is.

4. Explain what the Capital Asset Pricing Model (CAPM) is and calculate and explain the result of the CAPM based on the following data. a. Expected Return: 8% b. Risk-free rate: 4% c. Beta of the investment: 1.2 ER=Rf+B(ERm - Rf) where: ER = expected return of investment Rf risk-free rate B;= beta of the investment - (ERm - Rf) = market risk premium

a) Discuss the difference between a price-weighted index and a value-weighted index. Give one example for the price-weighted index and one example for the value-weighted index and discuss any problems/advantages associated with the specific indices. b) We assume that investors use mean-variance utility: U = E(r) – 0.5 × Ao², where E(r) is the expected return, A is the risk aversion coefficient and o? is the variance of returns. Given that the optimal proportion of the risky asset in the complete port- folio is given by the equation y* = E , where r; is the risk-free rate, E(rp) is the expected returm of the risky portfolio, o, is variance of returns, and A is the risk aversion coefficient. For each of the variables on the right side of the equation, discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively. Assume the investor is risk averse. Ao