Wilson, an investment manager, recently met with one of his clients. He typically invests in a master list of 50 stocks of NIFTY. As the meeting concluded, the client made the following statement: I trust your stock-picking ability and believe that you should invest my funds in your five best ideas. Why invest in 30 companies when you have stronger opinions on a few of them? Trudy plans to respond to his client within the context of modern portfolio theory.

1. Contrast the concept of systematic risk and firm-specific risk, and give an example of each type of risk.
2. Critique the clients suggestion. Discuss how systematic and firm-specific risk change as the number of securities in a portfolio increases.