Assuming we are using the CAPM to assess risk. There exists a security A with expected return of 13.1%, a stock beta of 1.5. Another security B has expected return of 9.25%, a stock beta of 0.8. The risk-free rate of return is 4.85%.

1. What is the difference between systematic risk and unsystematic risk? What does beta measure, systematic risk or unsystematic risk? (2 marks)

2. Using the data above do determine the expected market return? (3 marks)

c. Suppose that among the firm A and B, one belongs to the industry of pharmaceutical (drug) research and development, while the other belongs to utilities industry equipment (such as electricity supply). Which firm is more likely to be in each industry, why did you make this choice?