Risk Making Me Sick

Have you watched the free lecture on this (because it is all explained there)?

Risk in general is the fact that the market values (and returns) from shares fluctuate – the more they fluctuate then the more the risk.
The reason for the fluctuations is partly due to general economic factors (e.g. the level of inflation) – this is systematic risk and affects all shares (although to different levels depending on the business sector). The other reason is due to factors specific to the company (e.g. bad labour relations within the company and lots of strikes) – this is unsystematic risk.

We assume that overall investors diversify and invest in many shares, and in that way they can effectively remove the unsystematic risk. (This may not be the case for individual shareholders, but one individual shareholder does not affect the share price or return – it is shareholders overall who affect it. Particularly institutional investors such as pension funds, who certainly are well-diversified.) Therefore it is the level of systematic risk that determines the return required from a share – this is what CAPM is doing.

With regard to the unsystematic risk, you cannot be asked to do calculations on it in the exam – we assume always that CAPM ‘works’. However you can be asked to explain about systematic and unsystematic (as above) – the lecture does this and also does do some numbers to (hopefully) make sense of it, even though again the calculations regarding unsystematic risk are not required for the exam.

(Your statement about required return being 15% and an extra 2% for systematic risk does not make sense. The reason that the required return is 15% (and not 14% or not 16%) is purely because of the level of systematic risk.)

Again, I do think that watching the free lecture would help you because this is also answered there (with examples)!

The unsystematic risk cannot be measured directly as a %. What can be measured as a % is the total risk of the share, and also the systematic risk (which is beta x the std deviation of the market). From these two it is possible to calculate the unsystematic risk as a % (but this can no longer be asked in the exam).

With regard to alpha. Alpha is simply the difference between the actual return given by a share and the return that it should be giving according to CAPM. In a perfect world (where CAPM worked precisely) then alpha would always be zero.
In the real world, even though it is generally accepted that CAPM ‘works’ we do not have a perfect market and from day to day there will be an alpha – sometimes the share will be overpriced (and then would be a time to sell) and other times the share will be underpriced (and then would be a time to buy). However, we would expect that on average the alpha would be zero.
(I don’t know why or where ‘no further knowledge was gathered on alpha and its calculation’ – calculating alpha in the exam is easy, and it could be relevant in a question).