5F.4
4a. Give one example of systematic risk and one example of unsystematic risk. [2]
There are many correct answers here. Interest rate changes are a good example of systematic risk and a space-time singularity creating a temporary wormhole that swallows the entire headquarters and production operation of a single firm is an example of unsystematic risk.
4b. Which type of risk can a portfolio help you avoid? How? [3]
Holding a portfolio helps you avoid unsystematic risk. By holding a basket of stocks, the random unsystematic ups and downs of one stock will be tempered by offsetting unsystematic downs and ups of other stocks. You will be left with only systematic risk—exposure to events that move whole baskets of stocks.
4c. Which type of risk are you rewarded for bearing? Why? [3]
You are rewarded for bearing systematic risk. Since you can avoid bearing unsystematic risk simply by holding a diversified portfolio, no one is going to reward you for not doing so. In order to entice you to bear systematic risk (which you cannot diversify away), you have to be offered ever-increasing rewards.