Chapter 17 Quiz CFA Foundations
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1. 1 Systematic risk 1 B is correct. Systematic risk (also known as market risk) is the risk created by
is the portion of general economic conditions. A is incorrect because the risk that is related to a
total risk that: certain company or security is known as specific, idiosyncratic, non- systematic,
A is related to a or unsystematic risk. C is incorrect because specific risk, not systematic risk, is the
certain company result of a lack of diversification.
or security.
B is created by
general econom-
ic conditions.
C results from a
lack of portfolio
diversification.
2. 2 An investor cur- 2 B is correct. Adding securities that are less than perfectly positively correlated
rently owns a with the other securities in the portfolio will likely decrease the specific risk and,
portfolio of five therefore, the total risk. A is incorrect because the total risk of the portfolio will likely
securities. If the decrease, not increase, as a result of the decrease in specific risk. C is incorrect
investor adds an- because the portfolio's systematic risk is independent of the number of securities
other security to in the portfolio.
the portfolio that
is less than per-
fectly positively
correlated with
the other five se-
curities, the port-
folio's:
A total risk will
likely increase.
B specific risk will
likely decrease.
C systematic risk
1/6
, Chapter 17 Quiz CFA Foundations
Study online at https://quizlet.com/_gk490z
will likely de-
crease.
3. 3 The benefits of 3 A is correct. When securities with different characteristics are combined in a
risk reduction are portfolio, the overall level of risk is typically reduced as a result of diversification.
most likely to be The risk reduction benefits resulting from diversification are greatest when the
greater by com- securities have returns that exhibit a low correlation with each other. B is incorrect
bining securities because there will not be any diversification benefit when the securities in the
whose expected portfolio have returns that exhibit a perfectly positive correlation. C is incorrect
returns have a: because a less than perfect correlation will reduce risk but not as significantly as a
A low correla- low correlation.
tion.
B perfectly posi-
tive correlation.
C high, but less
than perfect, cor-
relation.
4. 4 The long- term 4 C is correct. Strategic asset allocation is the long- term mix of assets that is
mix of assets expected to meet the investor's objectives. The desired overall risk and return
that is expect- profile of the portfolio is a factor in determining the strategic asset allocation.
ed to meet an A is incorrect because diversification is the process of combining assets with
investor's objec- different characteristics in a portfolio for the purpose of reducing risk. B is incorrect
tives best de- because tactical asset allocation refers to short- term adjustments among asset
scribes: classes. Although the chosen strategic asset allocation is expected to meet the
A diversification. investor's objectives over the longer term, there may be times when shorter- term
B tactical asset al- fluctuations in asset class returns may be exploited to potentially increase returns.
location.
C strategic asset
allocation.
5.
2/6
Study online at https://quizlet.com/_gk490z
1. 1 Systematic risk 1 B is correct. Systematic risk (also known as market risk) is the risk created by
is the portion of general economic conditions. A is incorrect because the risk that is related to a
total risk that: certain company or security is known as specific, idiosyncratic, non- systematic,
A is related to a or unsystematic risk. C is incorrect because specific risk, not systematic risk, is the
certain company result of a lack of diversification.
or security.
B is created by
general econom-
ic conditions.
C results from a
lack of portfolio
diversification.
2. 2 An investor cur- 2 B is correct. Adding securities that are less than perfectly positively correlated
rently owns a with the other securities in the portfolio will likely decrease the specific risk and,
portfolio of five therefore, the total risk. A is incorrect because the total risk of the portfolio will likely
securities. If the decrease, not increase, as a result of the decrease in specific risk. C is incorrect
investor adds an- because the portfolio's systematic risk is independent of the number of securities
other security to in the portfolio.
the portfolio that
is less than per-
fectly positively
correlated with
the other five se-
curities, the port-
folio's:
A total risk will
likely increase.
B specific risk will
likely decrease.
C systematic risk
1/6
, Chapter 17 Quiz CFA Foundations
Study online at https://quizlet.com/_gk490z
will likely de-
crease.
3. 3 The benefits of 3 A is correct. When securities with different characteristics are combined in a
risk reduction are portfolio, the overall level of risk is typically reduced as a result of diversification.
most likely to be The risk reduction benefits resulting from diversification are greatest when the
greater by com- securities have returns that exhibit a low correlation with each other. B is incorrect
bining securities because there will not be any diversification benefit when the securities in the
whose expected portfolio have returns that exhibit a perfectly positive correlation. C is incorrect
returns have a: because a less than perfect correlation will reduce risk but not as significantly as a
A low correla- low correlation.
tion.
B perfectly posi-
tive correlation.
C high, but less
than perfect, cor-
relation.
4. 4 The long- term 4 C is correct. Strategic asset allocation is the long- term mix of assets that is
mix of assets expected to meet the investor's objectives. The desired overall risk and return
that is expect- profile of the portfolio is a factor in determining the strategic asset allocation.
ed to meet an A is incorrect because diversification is the process of combining assets with
investor's objec- different characteristics in a portfolio for the purpose of reducing risk. B is incorrect
tives best de- because tactical asset allocation refers to short- term adjustments among asset
scribes: classes. Although the chosen strategic asset allocation is expected to meet the
A diversification. investor's objectives over the longer term, there may be times when shorter- term
B tactical asset al- fluctuations in asset class returns may be exploited to potentially increase returns.
location.
C strategic asset
allocation.
5.
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