6. (a) Discuss the advantages and limits to diversification when constructing a portfolio of risky assets. (6 marks) (b) Explain the following concepts: (i) risk free asset (ii) unsystematic risk (iii) the efficient frontier (iv) the security market line (c) You are given the following information: (i) A stock with a beta of 0 has an expected return of 4%. (8 marks) (ii) A portfolio made up of 30% invested at the risk free rate and 70% invested in the market portfolio has an expected return of 15% What is the market risk premium? University of London 2018 UL18/0194 (4 marks) Question continues on next page. Page 3 of 4 DO (d) Discuss the problems associated with empirically testing the Capital Asset Pricing Model. (7 marks)