a) Risk can be separated into systematic and unsystematic risk. Define systematic and unsystematic risk and explain how diversification can reduce risk.

b) The Capital Asset Pricing Model (CAPM) defines a linear relationship between risk and return. Explain the model and what beta tells us about the risk associated with the company.

c) If the expected rate of return on the market is 8% and the risk free rate is 3%, a portfolio is expected to have the rate of return of 10%. Calculate beta and explain what assumptions concerning this portfolio and/or market conditions to calculate the portfolios beta and discuss the limitation of CAPM.