Question: a) Explain the difference between systematic risk and unsystematic risk. b) What are some examples of each? c) Assume you are considering an investment in

a) Explain the difference between systematic risk and unsystematic risk.

b) What are some examples of each?

c) Assume you are considering an investment in a new medical company that has developed a tiny robot that enters the body and (hopefully) destroys cancer tumors. If it works in clinical trials, the company will have cured cancer (and be very valuable); if it fails in clinical trials, the robot will be killing patients (and the company will be worthless). Under the CAPM approach, should this company have a high beta or a low beta, and explain why should that be the case?

d) If you wanted to use the company to diversify your existing holdings and reduce your risk, would you rather its correlation coefficient to the rest of your investments be -0.2 or 0.6? Explain.

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