David, CFA, recently met with one of his clients. David typically invests in a master list of 30 equities drawn from several industries. As the meeting concluded, the client made the following statement: I trust your stock selection ability and you should invest my funds in your five best suggestions. However, why are you making investments in 30 companies when you obviously have stronger opinions on a few of them ? David responds to his client within the context of

a) modern portfolio theory.

b) Contrast the concepts of systematic risk and firm-specific risk and give an example of each type of risk.

c) Comment on the clients suggestion and discuss how both systematic and firm-specific risk change as the number of securities in a portfolio is increased.

Please type your answer and use plain English in detail