UNIVERSITY OF SOUTH AFRICA
College of Economic and Management Sciences
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIM3701: Financial Management 3B
Assignment 01 — Semester 1, 2026
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIM3701
Module Code:
Financial Management 3B
Module Name:
Assignment 01
Assignment Number:
25
Total Marks:
Submitted in partial fulfilment of the requirements
for Financial Management 3B — UNISA 2026
,UNISA | FIM3701 Assignment 01 – 2026
Question 1: Risk and Capital Budgeting (Multiple Choice)
Question: Select only the statement that is true:
A. Companies with well diversified portfolios of projects should only be concerned with the
market risk as quantified by the Beta coefficient of the portfolio.
B. One method of incorporating risk into a capital budget is to use a risk-adjusted discount
rate.
C. None of the other statements/options is correct.
D. It is impossible to reduce diversifiable or unsystematic risk by adding more projects to a
portfolio.
Answer: B
1.1 Analysis of Each Option
Option A – Incorrect. Even well-diversified firms must consider both systematic (market)
risk and project-specific (unsystematic) risk, particularly when individual projects operate in
industries that are not correlated with the overall market. Sole reliance on Beta would cause
management to overlook firm-specific exposures (Brigham and Ehrhardt, 2020:390).
Option B – Correct. A risk-adjusted discount rate (RADR) is a recognised capital budget-
ing technique in which a higher discount rate is applied to riskier projects. Implying that, the
required rate of return is adjusted upward to compensate investors for bearing greater uncer-
tainty. Projects are then accepted only when their net present value (NPV) computed at this
adjusted rate is positive or zero (Ross, Westerfield and Jordan, 2022:315).
Option C – Incorrect. Option B is demonstrably correct; therefore, this catch-all option
does not apply.
Option D – Incorrect. Diversifiable (unsystematic) risk can be reduced by adding projects
with low or negative correlations to an existing portfolio. This is the core principle of diversifi-
cation in portfolio theory, as established by Markowitz (1952). Therefore, the assertion that it
is “impossible” to reduce unsystematic risk through diversification is false.
Page 2 of 22
, UNISA | FIM3701 Assignment 01 – 2026
Key Distinction
Systematic vs Unsystematic Risk: Systematic (market) risk affects the entire
economy and cannot be diversified away; it is measured by Beta. Unsystematic (diversi-
fiable) risk is firm-specific and can be reduced by holding a well-diversified portfolio of
projects or securities (Brigham and Ehrhardt, 2020:385).
Page 3 of 22
College of Economic and Management Sciences
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIM3701: Financial Management 3B
Assignment 01 — Semester 1, 2026
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIM3701
Module Code:
Financial Management 3B
Module Name:
Assignment 01
Assignment Number:
25
Total Marks:
Submitted in partial fulfilment of the requirements
for Financial Management 3B — UNISA 2026
,UNISA | FIM3701 Assignment 01 – 2026
Question 1: Risk and Capital Budgeting (Multiple Choice)
Question: Select only the statement that is true:
A. Companies with well diversified portfolios of projects should only be concerned with the
market risk as quantified by the Beta coefficient of the portfolio.
B. One method of incorporating risk into a capital budget is to use a risk-adjusted discount
rate.
C. None of the other statements/options is correct.
D. It is impossible to reduce diversifiable or unsystematic risk by adding more projects to a
portfolio.
Answer: B
1.1 Analysis of Each Option
Option A – Incorrect. Even well-diversified firms must consider both systematic (market)
risk and project-specific (unsystematic) risk, particularly when individual projects operate in
industries that are not correlated with the overall market. Sole reliance on Beta would cause
management to overlook firm-specific exposures (Brigham and Ehrhardt, 2020:390).
Option B – Correct. A risk-adjusted discount rate (RADR) is a recognised capital budget-
ing technique in which a higher discount rate is applied to riskier projects. Implying that, the
required rate of return is adjusted upward to compensate investors for bearing greater uncer-
tainty. Projects are then accepted only when their net present value (NPV) computed at this
adjusted rate is positive or zero (Ross, Westerfield and Jordan, 2022:315).
Option C – Incorrect. Option B is demonstrably correct; therefore, this catch-all option
does not apply.
Option D – Incorrect. Diversifiable (unsystematic) risk can be reduced by adding projects
with low or negative correlations to an existing portfolio. This is the core principle of diversifi-
cation in portfolio theory, as established by Markowitz (1952). Therefore, the assertion that it
is “impossible” to reduce unsystematic risk through diversification is false.
Page 2 of 22
, UNISA | FIM3701 Assignment 01 – 2026
Key Distinction
Systematic vs Unsystematic Risk: Systematic (market) risk affects the entire
economy and cannot be diversified away; it is measured by Beta. Unsystematic (diversi-
fiable) risk is firm-specific and can be reduced by holding a well-diversified portfolio of
projects or securities (Brigham and Ehrhardt, 2020:385).
Page 3 of 22
