The requirement was to explain the difference between systematic and unsystematic risk in relation to portfolio theory and the capital asset pricing model (CAPM). Many answers struggled to gain good marks, essentially due to a lack of knowledge.

Systematic risk cannot be reduced by portfolio diversification, while unsystematic risk can be reduced by portfolio diversification. Some candidates got this the wrong way round and said that systematic risk could be reduced by portfolio diversification.

Systematic risk includes both business risk and financial risk (as illustrated by the equity beta in the CAPM), however some candidates wrongly identified systematic risk with business risk and unsystematic risk with financial risk.

Investors can reduce risk by portfolio diversification and the CAPM assumes that investors have diversified portfolios, yet many answers suggested that companies should reduce unsystematic risk by diversifying business operations.

Some candidates discussed unnecessary material in their answers, for example the process whereby a proxy equity beta can be ungeared and regeared in calculating a project-specific cost of equity or a project-specific weighted average cost of capital.