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Question 1 of 10
1. Question
Markowitz demonstrated that a diversification strategy should take into account of which of the following?
I. The degree of covariance
II. Correlation between asset returns in a portfolio
III. The risk tolerance
IV. The degree in which the risk returns and lost of capitalCorrect
Markowitz demonstrated that a diversification strategy should take into account the degree of covariance or correlation between asset returns in a portfolio.
Incorrect
Markowitz demonstrated that a diversification strategy should take into account the degree of covariance or correlation between asset returns in a portfolio.
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Question 2 of 10
2. Question
The total risk of an asset or a portfolio can be divided into which of the following types of risk?
I. Systematic risk
II. Unsystematic risk
III. Calculated risk
IV. Uncalculated riskCorrect
The total risk of an asset or a portfolio can be divided into two types of risk: systematic risk and unsystematic risk.
Incorrect
The total risk of an asset or a portfolio can be divided into two types of risk: systematic risk and unsystematic risk.
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Question 3 of 10
3. Question
William Sharpe (1964) defined systematic risk as the portion of an asset’s variability that can be attributed to a common factor. It is also called?
I. Undiversifiable risk
II. Diversifiable risk
III. Market risk
IV. Chaotic riskCorrect
William Sharpe (1964) defined systematic risk as the portion of an asset’s variability that can be attributed to a common factor. It is also called undiversifiable risk or market risk.
Incorrect
William Sharpe (1964) defined systematic risk as the portion of an asset’s variability that can be attributed to a common factor. It is also called undiversifiable risk or market risk.
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Question 4 of 10
4. Question
Sharpe defined the portion of an asset’s variability that can be diversified away as unsystematic risk. It is also called as which of the following?
I. Diversifiable risk
II. Unique risk
III. Residual risk
IV. Idiosyncratic riskCorrect
Sharpe defined the portion of an asset’s variability that can be diversified away as unsystematic risk. It is also called diversifiable risk, unique risk, residual risk, idiosyncratic risk, or company-specific risk.
Incorrect
Sharpe defined the portion of an asset’s variability that can be diversified away as unsystematic risk. It is also called diversifiable risk, unique risk, residual risk, idiosyncratic risk, or company-specific risk.
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Question 5 of 10
5. Question
Company-specific risk is the risk that is unique to a company, such as which of the following?
I. A strike
II. The outcome of unfavorable litigation
III. A natural catastrophe
IV. A bridge of confidenceCorrect
Company-specific risk is the risk that is unique to a company, such as a strike, the outcome of unfavorable litigation, or a natural catastrophe.
Incorrect
Company-specific risk is the risk that is unique to a company, such as a strike, the outcome of unfavorable litigation, or a natural catastrophe.
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Question 6 of 10
6. Question
What happens to the level of unsystematic risk when the number of asset holdings increases?
I. Increased by two fold
II. Rejuvenated
III. Almost eliminated
IV. Diversified awayCorrect
As the number of asset holdings increases, the level of unsystematic risk is almost completely eliminated (that is, diversified away)
Incorrect
As the number of asset holdings increases, the level of unsystematic risk is almost completely eliminated (that is, diversified away)
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Question 7 of 10
7. Question
The relationship between the movement in which of the following can be estimated statistically?
I. The currency exchange rate
II. The stock exchange
III. The market
IV. The price of an assetCorrect
The relationship between the movement in the price of an asset and the market can be estimated statistically.
Incorrect
The relationship between the movement in the price of an asset and the market can be estimated statistically.
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Question 8 of 10
8. Question
Which of the following are products of the estimated relationship that investors use?
I. The sensitivity of an asset’s return to changes in the market’s movements
II. The beta of an asset
III. The ratio of the amount of systematic risk relative to the total risk
IV. The index of systematic risk to general market conditionsCorrect
There are two products of the estimated relationship that investors use. The first is the beta of an asset. Beta measures the sensitivity of an asset’s return to changes in the market’s return. Hence, beta is referred to as an index of systematic risk due to general market conditions that cannot be diversified away. The second product is the ratio of the amount of systematic risk relative to the total risk. This ratio is called the coefficient of determination or R-squared.
Incorrect
There are two products of the estimated relationship that investors use. The first is the beta of an asset. Beta measures the sensitivity of an asset’s return to changes in the market’s return. Hence, beta is referred to as an index of systematic risk due to general market conditions that cannot be diversified away. The second product is the ratio of the amount of systematic risk relative to the total risk. This ratio is called the coefficient of determination or R-squared.
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Question 9 of 10
9. Question
Which of the following risk(s) arises because of the variation in the value of an asset’s cash flows due to inflation?
I. Inflation risk
II. Asset value risk
III. Cash flow risk
IV. Purchasing power riskCorrect
Inflation risk, or purchasing power risk, arises because of the variation in the value of an asset’s cash flows due to inflation.
Incorrect
Inflation risk, or purchasing power risk, arises because of the variation in the value of an asset’s cash flows due to inflation.
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Question 10 of 10
10. Question
Which of the following is the risk that the investor’s return from the investment in an asset will be less than the rate of inflation?
I. Inflation risk
II. Purchasing power risk
III. Market risk
IV. Beta market riskCorrect
Inflation risk is the risk that the investor’s return from the investment in an asset will be less than the rate of inflation.
Incorrect
Inflation risk is the risk that the investor’s return from the investment in an asset will be less than the rate of inflation.