Explain why the risk of a portfolio of two stocks can be less than the individual risk of
each of those stocks individually.
Portfolio Risk – Systematic Risk
Individual Risk – Systematic and Unsystematic
Diversify unsystematic or unique risk
If a company has a β of 1.5 what does this mean?
Systematic risk is 1.5 times that of the market therefore compensation is 1.5
times market risk
Describe the risks for which shareholders would be compensated for under the
assumptions of the capital asset pricing model.
Systematic risks or market risks such as changes in interest rates
What is the Security Market Line?
Graphical representation of CAPM
What is the CAPM and what does it tell us?
Model that prices share based on risk ie Rf + (Rm – Rf ) Beta