Question

                                    Standard deviation                  Beta

Security A                   40%                                                     0.5

Security B                   20%                                                     1.5

1. Which security has a greater total risk? Explain. (2marks)
2. Which security has greater systematic risk? Explain. (2marks)
3. Can diversification eliminate systematic risk? Explain. (2marks)
4. The security market line (SML) is used to describe the relationship between systematic risk and expected return. If an investment has a positive NPV, would it plot above or below the SML? Explain.

Answer 1

1)	Security A has greater total risk. The reason is that it has
	higher standard deviation. SD is the measure of total risk.
2)	Security B has greater systematic risk. The reason is that
	it has higher beta. Beta is the measure of systematic risk.
3)	No, diversification cannot eliminate systematic risk, as
	systematic risk affects all securities, though to a different
	degree.
4)	If the NPV is positive, it means that the return from the
	project is higher than the required return per CAPM.
	Hence, it should plot above the SML.