CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Since systematic risk cannot be diversified away, how can portfolios have different degrees of risk?

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.
You need to log in first to add your comment.