Part I

Question 1: According to the video, how do we define risk?

Risk is the fact that actually happens may (and often does) differ from what we either expect or would
like to happen.

Question 2: According to the video, how would the risk of a portfolio consisting of stocks from a variety
of economic sectors compare to one consisting of stocks from just one sector? What is the technical
finance term for this concept?
As per the video, the returns for a portfolio comprised of stocks from a variety of economic will have
much less volatility than that of a stock from just one sector. For this concept, the technical finance term
is “Diversifying risk”.

Question 3: According to the video, what is the difference between std. dev. and beta in terms of
measuring risk?
As per the given video, total risk, both non-diversifiable and diversifiable are measured by standard
deviation. Only non-diversifiable risk is measured by Beta.

Question 4: According to the video, what are some caveats associated with CAPM?
As per the video, some cautions related to CAPM include:
- Measures of betas for a given asset can vary depending on how it is calculated.
- The relationship of “risk/return” rest on the assumptions that the stock is prices “correctly”.
- This in turn, requires that asset markets are efficient.
- Given historical events and other evidence, there are reasons to question how “efficient”
marketplaces are at pricing an asset at its intrinsic or true value.

Question 5: According to the video, what is the difference between systematic and unsystematic risk?
How is each type of risk impacted by holding a well-diversified portfolio?
According to the video, one can diversify the unsystematic risk. These are the specific risks that can be
faced by a firm. On the other hand, one cannot eliminate the systematic risk. These are the risks at market
level. If one holds a well-diversified portfolio, it can assist in diversifying the unsystematic risk; however,
systematic risk cannot be eliminated. The portfolio risk can be reduced with the addition of more stocks
to the portfolio.

Part II
Question 1:
1. The portfolio’s beta= 1/5*0.8+1/5*-1.3+1/5*0.95+1/5*1.2+1/5*1.4= 0.61
2. Required return= RF rate+ (Market rate-RF rate) *beta= 5.44%
Question 2:
Probability Outcome
 0.5 -6%
0.5 18%
A. Expected return = (-6%+18%)/2= 6%
B. SD= STDEV.S(-6%->18%) = 0.113
C. Coefficient of variation= 1.89

Part III
Question 1: What is the rationale for the positive correlation between risk and expected return?
In fact, investors are often very mindful of the risk factor of an investment. Usually, they will only accept
investments in high-risk projects when they see an opportunity to get a higher than normal return on that
investment. This extra profit is the reward for the investor's courage to take the risk.
Question 2: Why is it possible to eliminate unsystematic risk in a well-diversified portfolio? Likewise,
why is it not possible to eliminate systematic risk?
- It is unlikely that unsystematic risks can occur in every company at the same time. Therefore, it is
possible to eliminate unsystematic risk in a well-diversified portfolio.
- Systematic risk cannot be eliminated through diversification because it is a non-specific risk, it is
both unpredictable and completely unavoidable, and it affects the entire market.

#Video Summary
- Concept of risk & return: Risk & Return relationship is fundamental in finance theory. The
principle we follow in finance is that investors need the inducement of higher reward to take on
perceived higher risks. Risk is the fact that actually happens may (and often does) differ from
what we either expect or would like to happen. To measure risk, we need to calculate the
volatility of the return or define a measure of non-diversifiable risk as “beta” About return on an
investment, we invest in a stock with the hope of earning a positive on our investment. With
stocks, there are two components that contribute the return: divided payment and stock-price
appreciation. To calculate return, we can calculate the percentage return is equal to total of
Capital Gains Yield and Dividend Yield. We can reduce volatility by grouping asset in to
portfolio, this is known as Diversifying risk.
- The Risk premium is the reward investors require for taking-on the risk of investing in the stock.
We can combine our prior discussion of Beta, Risk Premium in the Capital Asset Pricing
Model(CAPM). For example, Required returned on Stock i = Risk-free rate + Market Risk
Premium * Stock i’s Beta coefficient.

Link to the video