1. Differentiate between the terms 'Systematic risk' and 'unsystematic risk.

1. What is the meaning of beta and what is it used for?

1. The following information relating to a portfolio was given to you:

.

Stock Percentage Beta

of portfolio

1 40% 1.00

2 25% 0.75

3 35% 1.50

The risk free rate is 8 percent and the expected return on the market portfolio is 12 percent.

1. Using CAPM formula, calculate the expected return for stocks 1, 2 and 3.

1. Sketch the security market line (SML) and show where the securities fit on the graph.
3. Interpret the results based on (ii) above and indicate which stock might be undervalued or overvalued

Question 2

1. You are an investment advisor. During a consultation a client says to you "I want to

diversify my portfolio. I currently hold investments in two companies, but I've read that if I add more assets to my portfolio, I can eliminate risk completely."

Explain the principle of diversification, then using a diagram, advice the investor as to whether his assumption is correct.

1. Outline FIVE (5) basic assumptions behind Markowitz portfolio theory,

1. What are the similarities and differences between the Capital Market Line (CML) and Securities Market Line (SML) as models of the risk-return trade-off