Question
1) Explain the systematic risk and unsystematic risk by using mathematical 3 examples if it is possible 2) create 3 multiple questions and solve it related to systematic risk and unsystematic risk 3) create 3 true/false questions and solve it related to systematic risk and unsystematic risk

PART 1

• Systematic risk is the market risk that exists in a well-diversified portfolio of assets. For example, the risk of failure of the economy of a country is a market risk.
• Unsystematic risk is the asset specific risk that exists in a less diversified portfolio for assets. For example, the risk of failure of internal management is an unsystematic risk

MATHEMATICALLY,

1. Using CAPM equation, systematic risk measurement : Expected Return = Risk free rate + Beta (Market return - risk free rate) + error term
2. Beta is a measurement of systematic risk = Beta of a portfolio (P) = Correlation (portfolio return, market return)* portfolio standard deviation / market standard deviation
3. Total risk (standard deviation) of a portfolio = systematic risk + unsystematic risk

PART 2

 Measure of systematic risk is:- a) Gamma b) Beta c) Delta
 Formula for systematic risk in CAPM equation of a stock is:- a) Covariance (Stock return, Market return)/Variance (Stock Return) b) Covariance (Stock return, Market return)/Variance (Market Return) c) Correlation (Stock return, Market return)/Variance (Market Return)
 If β > 1, this implies that the correlation between the market and the portfolio is:- a) positive b) negative c) inverse

PART 3

 Beta is a meaure of unsystematic risk FALSE Systematic risk is reduced by diversification of portfolio FALSE Unsystematic risk is stock specific TRUE

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