CFA Investment Foundations Exam Practice Questions &
Answers 2025 Update
1 Systematic risk is the portion of total risk that:
A is related to a certain company or security.
B is created by general economic conditions.
C results from a lack of portfolio diversification. - ✔✔✔ - 1 B is correct. Systematic risk (also known
as market risk) is the risk created by general economic conditions. A is incorrect because the risk that
is related to a certain company or security is known as specific, idiosyncratic, non- systematic, or
unsystematic risk. C is incorrect because specific risk, not systematic risk, is the result of a lack of
diversification.
2 An investor currently owns a portfolio of five securities. If the investor adds another security to the
portfolio that is less than perfectly positively correlated with the other five securities, the portfolio's:
A total risk will likely increase.
B specific risk will likely decrease.
C systematic risk will likely decrease. - ✔✔✔ - 2 B is correct. Adding securities that are less than
perfectly positively correlated with the other securities in the portfolio will likely decrease the
specific risk and, therefore, the total risk. A is incorrect because the total risk of the portfolio will
likely decrease, not increase, as a result of the decrease in specific risk. C is incorrect because the
portfolio's systematic risk is independent of the number of securities in the portfolio.
3 The benefits of risk reduction are most likely to be greater by combining securities whose expected
returns have a:
A low correlation.
B perfectly positive correlation.
C high, but less than perfect, correlation. - ✔✔✔ - 3 A is correct. When securities with different
characteristics are combined in a portfolio, the overall level of risk is typically reduced as a result of
diversification. The risk reduction benefits resulting from diversification are greatest when the
securities have returns that exhibit a low correlation with each other. B is incorrect because there
will not be any diversification benefit when the securities in the portfolio have returns that exhibit a
perfectly positive correlation. C is incorrect because a less than perfect correlation will reduce risk
but not as significantly as a low correlation.
4 The long- term mix of assets that is expected to meet an investor's objectives best describes:
Answers 2025 Update
1 Systematic risk is the portion of total risk that:
A is related to a certain company or security.
B is created by general economic conditions.
C results from a lack of portfolio diversification. - ✔✔✔ - 1 B is correct. Systematic risk (also known
as market risk) is the risk created by general economic conditions. A is incorrect because the risk that
is related to a certain company or security is known as specific, idiosyncratic, non- systematic, or
unsystematic risk. C is incorrect because specific risk, not systematic risk, is the result of a lack of
diversification.
2 An investor currently owns a portfolio of five securities. If the investor adds another security to the
portfolio that is less than perfectly positively correlated with the other five securities, the portfolio's:
A total risk will likely increase.
B specific risk will likely decrease.
C systematic risk will likely decrease. - ✔✔✔ - 2 B is correct. Adding securities that are less than
perfectly positively correlated with the other securities in the portfolio will likely decrease the
specific risk and, therefore, the total risk. A is incorrect because the total risk of the portfolio will
likely decrease, not increase, as a result of the decrease in specific risk. C is incorrect because the
portfolio's systematic risk is independent of the number of securities in the portfolio.
3 The benefits of risk reduction are most likely to be greater by combining securities whose expected
returns have a:
A low correlation.
B perfectly positive correlation.
C high, but less than perfect, correlation. - ✔✔✔ - 3 A is correct. When securities with different
characteristics are combined in a portfolio, the overall level of risk is typically reduced as a result of
diversification. The risk reduction benefits resulting from diversification are greatest when the
securities have returns that exhibit a low correlation with each other. B is incorrect because there
will not be any diversification benefit when the securities in the portfolio have returns that exhibit a
perfectly positive correlation. C is incorrect because a less than perfect correlation will reduce risk
but not as significantly as a low correlation.
4 The long- term mix of assets that is expected to meet an investor's objectives best describes:
