Reading 70: The Portfolio Management Process and the Investm 2011, Investment, following, correct, center

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Session 18: Portfolio Management: Capital Market Theory and the Portfolio Management Process
Reading 70: The Portfolio Management Process and the Investment Policy Statement

LOS a: Explain the importance of the portfolio perspective.

 

 

Which one of the following alternatives correctly outlines the importance of the portfolio perspective?

A) Market participants should attempt to eliminate the unsystematic risk associated with each security by forming portfolios that will diversify away this risk.

B) Market participants should focus on the systematic risk of the components of a portfolio not the unsystematic risk of the components of a portfolio.

C) Market participants should analyze the risk-return trade-off of a portfolio as a whole, not the risk-return trade-off of the individual investments in a portfolio.

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The key underlying principle of the portfolio perspective is that market participants should analyze the risk-return trade-off of the portfolio as a whole, not the risk-return trade-off of the individual investments in the portfolio.

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Equity pricing models assume which risk is priced?

A) Unsystematic.

B) Both systematic and unsystematic.

C) Systematic.

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Unsystematic risk can be diversified away. Thus, equity-pricing models are designed to reflect only systematic risk. It is assumed that the portfolio manager will take steps to diversify and reduce risk.

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Diversification can reduce:

A) systematic risk.

B) macroeconomic risks.

C) unsystematic risk.

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Systematic risk reflects factors that have a general effect on the security markets as a whole, and cannot be diversified away. Macroeconomic risk comes in many forms, and it is usually considered systematic risk. Unsystematic risk can be reduced through diversification.