CFA Practice Question
As you add more stocks to a portfolio, the systematic risk of the portfolio ______.
A. falls
B. may rise or fall
C. remains unaffected
Explanation: The systematic risk of a portfolio is a weighted average of the systematic risks of the individual instruments in the portfolio. As a result, adding high beta securities to a portfolio may raise its systematic risk.
User Contributed Comments 12
| User | Comment |
|---|---|
| rickeling | cunning question. |
| fahad | adding low betas to the portfolio will lower the systematic risk |
| sebjiguet | According to my notes, the systematic risk cannot be diversified away. So isn't C correct? |
| leitho | The systematic risk is the risk that is inherent in the market that cannot be diversified away. However, different securities may respond differently to market changes, and thus may have different systematic risks. For example, automobile manufacturers are much more sensitive to market changes that discount retailers (e.g. Wal-Mart). As a result, automobile manufacturers have higher systematic risk. |
| uberstyle | systematic risk can vary by security. |
| ontrack | another way to look at this is using global investing. If we add international stocks to the portfolio, we can reduce(or increase) systematic risk further. So B is correct. Hard question. |
| todolist | systematic risk here means beta, so adding securties with different beta may change the beta of the portfolio |
| ngeheboy | systematic risk of the market cannnot be diversified away, but systematic risk of individual porfolios may rise or fall. is my assumption correct? |
| pooji | ^^ yes you are. remember systematic risk can never be reduced to 0, but it can fluctuate based on the composition of your portfolio |
| Thecatz | systematic risk can be reduced by 0 if you just buy T-bill (aproximately), cannot ? |
| RAustin | What is the systematic risk of a portfolio of 2 stocks? Not that of the market portfolio. Sys risk of a market cannot be diversified. Treasuries and cash won't save you in a sovereign default either. |
| bmueller82 | I thought that only the unsystematic risk can be lowered by diversification???? |