Question 1. a) Why does a diversified portfolio reduce unsystematic (business) risk but have no impact on systematic (market) risk?

b) What conditions must be met for a portfolio to be diversified?

C) How many assets are necessary to achieve diversification?

Question 2. a) What is the difference between beta coefficient and standard deviation as measure of risk?

b) How may the beta be used in the capital asset pricing model to help determine the required return on a stock?

Problem 1. Assume a portfolio of assets with the following expected return:

Technology Stock 20%

Pharmaceutical Stock 15%

Utility Stock 10%

Savings Account 5%

1. What is the expected return on the portfolio if the investor invests an equal amount on each asset?
2. What is the expected return on the portfolio if the investor invests 50% on technology stocks, 10% in pharmaceutical stock, 24% in utility stock and the rest the investor puts in a saving account?