1. What is the difference between firm-specific risk and unsystematic risk?
2. Explain why diversification reduces unsystematic risk but not systematic risk.
3. Explain what happens to the standard deviation of returns of a portfolio as the number of stocks in the
portfolio increases.
4. Enrique owns five stocks: Alaska Airlines, American Airlines, Delta Airlines, Southwest Airlines, and Ford.
Radha also owns five stocks: Apple, McDonald’s, Tesla, Facebook, and Disney. Does Enrique or Radha have
a more diversified portfolio?
5. You are considering purchasing shares in a company that has a beta of 0.8. Explain what this beta means.
6. Explain how the Sharpe ratio and the Treynor ratio can be considered reward-to-risk measures.