Concept Checks

3.1: prefer investment A, because of the possibility of a high payoff
Given that they have the same expected return and standard deviation, I would choose the investment with a likelihood (albeit small) that I will quadruple my money.

3.2: No.
I would view the invetment that went down as more risky. It is downside risk that I would be concerned about.

3.3: Generally True.
The owners of privately owned firms are not well diversified. Hence, they tend to be concerned about all risk (rather than just market risk) and demand higher discount rates to cover the risk.

3.4: False
A well-managed firm will earn higher returns, but market risk cannot be altered by the quality of management.

3.5: Borrow money and buy a well-diversified portfolio
The most efficient way to take risk in the CAPM portfolio is to stay diversified and use leverage to increase risk.

3.6: All of the above
Negative beta firms reduce the risk of a well-diversified portfolio against some market risk. It will earn less than the riskless rate, and thus is not appropriate as a stand-alone investment.