Portfolio theory and CAPM question and answers graded A+

Portfolio theory and CAPM question and answers graded A+ Basic principle of portfolio theory - correct answer Do not put all your eggs in one basket i.e. donot invest entirely in one company. Reduction of risk - how - correct answer Reduce risk by investing in a portfolio of investments. Reduction of risk - negative correlation - correct answer When the returns from one company decrease, the returns from another company increase. Aim is to achieve maximum negative correlation. How is maximum negative correlation achieved? - correct answer Through diversification i.e. spreading risk into as many different companies as possible. Types of risk to which an investor is exposed - correct answer - Systematic risk (market risk) - Unsystematic risk (industry/company specific risk) Reduction of systematic and unsystematic risk - how? - correct answer Unsystematic risk can be diversified away however, systematic risk cannot be mitigated or diversified away. What does the beta factor measure? - correct answer Measures the systematic risk of an individual investment in comparison to the systematic risk of a market. Interpreting beta => B = 1 - correct answer - The risk inherent in the investment is exactly the same as the one in the market. Interpreting beta => B > 1 - correct answer - The risk of the investment is greater than the market risk (aggressive investment - good for bull markets) Interpreting beta => B < 1 - correct answer - The risk of the investment is less than the market risk (defensive investment - good for bear markets)