CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Why is systematic risk considered important?
A. Because the risk premium depends only on this type of risk.
B. Because it is needed in order to measure the total risk of an asset.
C. Because the risk premium depends on both systematic and unsystematic risk.

User Contributed Comments 9

User Comment
danlan Why not the answer of "total risk"?
americade i agree but identifiable (non-systematic) risk can be measured independently from systematic measurement.
galgan because the MARKET risk premium depends on...
CoffeeGirl since you should diversify unsystemastic risk, all that matters is the systemastic risk which determines the risk premium.
monteleone Unsystematic risk (business specific risk) can be diversified away. Systematic risk (market risk) cannot. Therefore the market risk premium is dependent on systematic (market) risk.
Criticull there is more than one right answer here...choosing the "best" answer is an exercise in the examiner's subjectivity. i realize the exam might be like this.
farhan92 not really Ctiticull...an investor should not expect to receive additional return for bearing unsystematic risk so the premium is purely for systematic risk.
NickGerli The word "market" is needed.

farhan...why wouldn't the investor expect additional return for bearing unsystematic risk? Why would anyone invest in junk bonds if that were the case?
jyoti NickGerli: the market will not reward you anything extra for bearing non-systematic risk. You have two concepts mixed: systematic risk versus non-systematic risk, and higher risk versus lower risk. Non-systematic risk is diversifiable, which means through diversification you can get the same expected return while getting rid of the non-systematic risk. Then why would the market pay for that?
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