Question $1$

The capital asset pricing model $($CAPM$)$ contends that there is systematic and unsystematic

risk for an individual security. Which is the relevant risk variable and why it is relevant? Why

is the other risk variable not relevant?

Question $2$

You have recently been appointed chief investment officer of a major charitable foundation.

Its large endowment fund is currently invested in a broadly diversified portfolio of stocks

$(60\%)$ and bonds $(40\%).$ The foundation's board of trustees is a group of prominent individuals

whose knowledge of modern investment theory and practice is superficial. You decide a

discussion of basic investment principles would be helpful.

Explain the concepts of specific risk, systematic risk, variance, covariance, standard deviation,

and beta as they relate to investment management.