- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 2. Portfolio Risk and Return: Part II
- Subject 2. Systematic Risk and Unsystematic Risk
CFA Practice Question
Since systematic risk cannot be diversified away, how can portfolios have different degrees of risk?
B. Some portfolios are less efficient than others.
C. All efficient portfolios have the same amount of systematic risk; it is just that we have so much random error that some portfolios look less risky than others.
D. They don't. All portfolios on the CML have the same degree of systematic risk, since they all are made up of the market portfolio and the riskless asset.
A. Systematic risk is a function covariance of a portfolio's returns with the returns of the market. Forming portfolios that have a low (high) covariance with the market will have low (high) systematic risk.
B. Some portfolios are less efficient than others.
C. All efficient portfolios have the same amount of systematic risk; it is just that we have so much random error that some portfolios look less risky than others.
D. They don't. All portfolios on the CML have the same degree of systematic risk, since they all are made up of the market portfolio and the riskless asset.
Correct Answer: A
Systematic risk is a function covariance of a portfolio's returns with the returns of the market. Systematic risk represents the amount of risk that must be borne in any given efficient portfolio.
User Contributed Comments 3
| User | Comment |
|---|---|
| jpducros | Systematic risks looks very similar to the definition of the Beta...is it the same ? |
| vinooka | Not exactly...systmatic risk is an absolute measure i.e.,Cov(i,M)..where i is an investment and M is market. Beta is a standardized relative measure -> Cov(i,M)/var(M) |
| johntan1979 | Yup, the formula of beta (systematic risk). Lower covariance with the market reduces the numerator, hence reducing the systematic risk, and vice versa. |