The responses for open ended questions should range from $4$ to $6$ lines.

Complete all questions.

What is correlation, and why is it important? Describe the characteristics of returns that are $($a$)$

positively correlated, $($b$)$ negatively correlated, and $($c$)$ uncorrelated. Differentiate between perfect

positive correlation and perfect negative correlation.

What is diversification? How does the risk of a diversified portfolio compare with the risks of

the individual assets it contains?

Briefly define and give examples of each of the following components of total risk. Which

type of risk matters, and why?

a$.$ Diversifiable $($or firm$-$specific$)$ risk

b$.$ Undiversifiable $($or systematic$)$ risk

Explain what is meant by beta. What risk does beta measure? What is the market return? How

is the interpretation of beta related to the market return?

Problem Set:

Find the expected returns of following stocks by using the CAPM equation:

Facebook $($FB$)$

Wells Fargo & Company $($WFC$)$

Essentra plc $($FLRAF$)$

Provide explanation and references of following:

a$.$ Interpret the expected return you get from CAPM equation. How beta value affects the

expected return of the stock.

b$.$ From where you are obtaining value of beta.

c$.$ Are you using $2$ years or $5$ years beta value? Explain your reasoning.

d$.$ What is the source of your risk$-$free rate and what is your reason to select it$?$

If all answers are no addressed properly, problem set would be considered incomplete and

will carry no grades. Again, do not forget to provide the references.