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Cmfas M8 Quiz 14 covered-
4.RISK AND RETURN : –
6.Classification Of Risks
7.Diversification Reduces Risks:
Diversification Options
8.Risk-Adjusted Investment Returns:
Information Ratio
Sharpe Ratio
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What is the primary distinction between systematic risk and unsystematic risk in the context of investments?
Explanation:
The correct answer is (a) Systematic risk is specific to a particular company or industry, while unsystematic risk affects the entire market. Systematic risk, also known as market risk, is related to factors that impact the entire market, while unsystematic risk, also known as specific risk, is specific to individual companies or industries.
Explanation:
The correct answer is (a) Systematic risk is specific to a particular company or industry, while unsystematic risk affects the entire market. Systematic risk, also known as market risk, is related to factors that impact the entire market, while unsystematic risk, also known as specific risk, is specific to individual companies or industries.
In a situation where a company’s stock price is primarily influenced by changes in overall market conditions, what type of risk is predominant?
Explanation:
The correct answer is (a) Systematic risk. Systematic risk, or market risk, refers to factors that affect the entire market. Changes in overall market conditions, such as economic indicators or geopolitical events, contribute to systematic risk.
Explanation:
The correct answer is (a) Systematic risk. Systematic risk, or market risk, refers to factors that affect the entire market. Changes in overall market conditions, such as economic indicators or geopolitical events, contribute to systematic risk.
Consider an investor who diversifies their investment portfolio by holding a mix of stocks from various industries. What is the objective of this diversification concerning the classification of risks?
Explanation:
The correct answer is (a) Reducing systematic risk. Diversification aims to reduce systematic risk by spreading investments across different assets or industries. While unsystematic risk may still exist, the overall impact on the portfolio is mitigated.
Explanation:
The correct answer is (a) Reducing systematic risk. Diversification aims to reduce systematic risk by spreading investments across different assets or industries. While unsystematic risk may still exist, the overall impact on the portfolio is mitigated.
In a scenario where an investor encounters a loss due to unexpected events affecting a specific industry, what type of risk is likely responsible for this loss?
Explanation:
The correct answer is (b) Unsystematic risk. Unsystematic risk, also known as specific risk, is specific to individual companies or industries. Losses resulting from unexpected events affecting a specific industry are attributed to unsystematic risk.
Explanation:
The correct answer is (b) Unsystematic risk. Unsystematic risk, also known as specific risk, is specific to individual companies or industries. Losses resulting from unexpected events affecting a specific industry are attributed to unsystematic risk.
How might changes in interest rates impact the classification of risks in an investment portfolio?
Explanation:
The correct answer is (c) Changes in interest rates can impact both systematic and unsystematic risks. Interest rate fluctuations can influence various aspects of the market, affecting both systematic risk (market risk) and specific risks associated with individual assets.
Explanation:
The correct answer is (c) Changes in interest rates can impact both systematic and unsystematic risks. Interest rate fluctuations can influence various aspects of the market, affecting both systematic risk (market risk) and specific risks associated with individual assets.
In a situation where an investor holds a large portion of their portfolio in one specific stock, what risk is the investor most exposed to?
Explanation:
The correct answer is (b) Unsystematic risk. Holding a large portion of a portfolio in one specific stock increases exposure to unsystematic risk. If adverse events affect that particular company, the impact on the overall portfolio could be significant.
Explanation:
The correct answer is (b) Unsystematic risk. Holding a large portion of a portfolio in one specific stock increases exposure to unsystematic risk. If adverse events affect that particular company, the impact on the overall portfolio could be significant.
Consider a scenario where an investor experiences a loss due to a broad economic downturn affecting multiple industries. What type of risk is likely responsible for this loss?
Explanation:
The correct answer is (a) Systematic risk. Losses resulting from a broad economic downturn affecting multiple industries are attributed to systematic risk, as it impacts the entire market.
Explanation:
The correct answer is (a) Systematic risk. Losses resulting from a broad economic downturn affecting multiple industries are attributed to systematic risk, as it impacts the entire market.
In a hypothetical situation where an investor has successfully diversified their portfolio, what impact would this have on the overall risk profile?
Explanation:
The correct answer is (c) Diversification reduces both systematic and unsystematic risks. Diversification aims to spread risk across different assets, thereby reducing the impact of both systematic (market-wide) and unsystematic (specific) risks on the overall portfolio.
Explanation:
The correct answer is (c) Diversification reduces both systematic and unsystematic risks. Diversification aims to spread risk across different assets, thereby reducing the impact of both systematic (market-wide) and unsystematic (specific) risks on the overall portfolio.
What is the primary purpose of diversification in investment portfolios?
Explanation:
The correct answer is (d) To reduce overall portfolio risk. Diversification involves spreading investments across different assets or asset classes to reduce the impact of any single investment’s poor performance on the overall portfolio. This helps mitigate risk and achieve a more balanced risk-return profile.
Explanation:
The correct answer is (d) To reduce overall portfolio risk. Diversification involves spreading investments across different assets or asset classes to reduce the impact of any single investment’s poor performance on the overall portfolio. This helps mitigate risk and achieve a more balanced risk-return profile.
In a scenario where an investor holds a portfolio consisting solely of stocks from one industry, what type of risk is the investor most exposed to?
Explanation:
The correct answer is (b) Systematic risk. Holding a portfolio concentrated in one industry increases exposure to systematic risk, also known as market risk. Events affecting the entire market, such as economic downturns, can have a significant impact on the portfolio.
Explanation:
The correct answer is (b) Systematic risk. Holding a portfolio concentrated in one industry increases exposure to systematic risk, also known as market risk. Events affecting the entire market, such as economic downturns, can have a significant impact on the portfolio.
Consider a situation where an investor diversifies their portfolio by including assets from different sectors, such as stocks, bonds, and real estate. How does this diversification impact risk?
Explanation:
The correct answer is (c) It reduces overall portfolio risk. Diversifying a portfolio across different asset classes helps reduce overall risk by spreading exposure to various market forces. It is a strategic approach to achieve a more balanced risk-return profile.
Explanation:
The correct answer is (c) It reduces overall portfolio risk. Diversifying a portfolio across different asset classes helps reduce overall risk by spreading exposure to various market forces. It is a strategic approach to achieve a more balanced risk-return profile.
In a hypothetical situation where an investor adds international securities to their portfolio, how might this contribute to risk reduction?
Explanation:
The correct answer is (d) International securities contribute to diversification and reduce overall portfolio risk. Including international securities in a portfolio enhances diversification by exposing the investor to different global market forces, helping reduce risk associated with regional economic events.
Explanation:
The correct answer is (d) International securities contribute to diversification and reduce overall portfolio risk. Including international securities in a portfolio enhances diversification by exposing the investor to different global market forces, helping reduce risk associated with regional economic events.
Mr. Anderson is considering diversifying his investment portfolio. Which of the following actions would be most effective in achieving diversification?
Explanation:
The correct answer is (c) Combining stocks, bonds, and real estate in the portfolio. Diversification is most effective when it involves a mix of different asset classes, as this helps spread risk across various market forces and economic conditions.
Explanation:
The correct answer is (c) Combining stocks, bonds, and real estate in the portfolio. Diversification is most effective when it involves a mix of different asset classes, as this helps spread risk across various market forces and economic conditions.
How does diversification address unsystematic risk in a portfolio?
Explanation:
The correct answer is (c) By spreading investments across different assets or sectors. Diversification addresses unsystematic risk by spreading investments across various assets, industries, or sectors. This helps reduce the impact of adverse events specific to one investment.
Explanation:
The correct answer is (c) By spreading investments across different assets or sectors. Diversification addresses unsystematic risk by spreading investments across various assets, industries, or sectors. This helps reduce the impact of adverse events specific to one investment.
Consider a scenario where an investor focuses on investing in assets with low correlation to each other. How does this strategy contribute to risk management?
Explanation:
The correct answer is (c) Low correlation enhances diversification and reduces overall portfolio risk. Investing in assets with low correlation means they are less likely to move in tandem, providing better risk mitigation when combined in a portfolio.
Explanation:
The correct answer is (c) Low correlation enhances diversification and reduces overall portfolio risk. Investing in assets with low correlation means they are less likely to move in tandem, providing better risk mitigation when combined in a portfolio.
In a situation where an investor only holds assets that are highly correlated with each other, what is the likely impact on risk?
Explanation:
The correct answer is (d) Highly correlated assets increase overall portfolio risk. Assets with high correlation are more likely to move in the same direction, providing limited risk reduction. Diversification is less effective when assets are highly correlated, leading to increased overall portfolio risk.
Explanation:
The correct answer is (d) Highly correlated assets increase overall portfolio risk. Assets with high correlation are more likely to move in the same direction, providing limited risk reduction. Diversification is less effective when assets are highly correlated, leading to increased overall portfolio risk.
What does the Information Ratio measure in the context of risk-adjusted investment returns?
Explanation:
The correct answer is (a) Total return relative to a benchmark. The Information Ratio assesses the portfolio manager’s ability to generate excess returns compared to a chosen benchmark, taking into account both the return and the level of risk taken to achieve it.
Explanation:
The correct answer is (a) Total return relative to a benchmark. The Information Ratio assesses the portfolio manager’s ability to generate excess returns compared to a chosen benchmark, taking into account both the return and the level of risk taken to achieve it.
Mr. Johnson manages a portfolio with an Information Ratio of 0.8, while Mr. Smith manages a portfolio with an Information Ratio of 1.5. What does this indicate about their respective performances?
Explanation:
The correct answer is (b) Mr. Smith outperformed Mr. Johnson. A higher Information Ratio indicates a better risk-adjusted performance. Therefore, Mr. Smith, with an Information Ratio of 1.5, outperformed Mr. Johnson, who has an Information Ratio of 0.8.
Explanation:
The correct answer is (b) Mr. Smith outperformed Mr. Johnson. A higher Information Ratio indicates a better risk-adjusted performance. Therefore, Mr. Smith, with an Information Ratio of 1.5, outperformed Mr. Johnson, who has an Information Ratio of 0.8.
Consider two investment portfolios: Portfolio A has an Information Ratio of 1.2, and Portfolio B has an Information Ratio of 0.5. What can be inferred about the risk-adjusted performance of these portfolios?
Explanation:
The correct answer is (a) Portfolio A has higher risk-adjusted performance. A higher Information Ratio indicates better risk-adjusted performance. Therefore, Portfolio A, with an Information Ratio of 1.2, has a superior risk-adjusted performance compared to Portfolio B.
Explanation:
The correct answer is (a) Portfolio A has higher risk-adjusted performance. A higher Information Ratio indicates better risk-adjusted performance. Therefore, Portfolio A, with an Information Ratio of 1.2, has a superior risk-adjusted performance compared to Portfolio B.
In the context of the Information Ratio, what does a negative value indicate?
Explanation:
The correct answer is (a) The portfolio underperformed the benchmark. A negative Information Ratio suggests that the portfolio failed to generate excess returns compared to the benchmark, indicating underperformance.
Explanation:
The correct answer is (a) The portfolio underperformed the benchmark. A negative Information Ratio suggests that the portfolio failed to generate excess returns compared to the benchmark, indicating underperformance.
Suppose an investor is assessing two mutual funds. Fund X has an Information Ratio of 0.9, and Fund Y has an Information Ratio of -0.3. What conclusion can be drawn about these funds?
Explanation:
The correct answer is (a) Fund X outperformed Fund Y on a risk-adjusted basis. A positive Information Ratio indicates better risk-adjusted performance, so Fund X, with an Information Ratio of 0.9, outperformed Fund Y, which has a negative Information Ratio.
Explanation:
The correct answer is (a) Fund X outperformed Fund Y on a risk-adjusted basis. A positive Information Ratio indicates better risk-adjusted performance, so Fund X, with an Information Ratio of 0.9, outperformed Fund Y, which has a negative Information Ratio.
In a scenario where two portfolios have the same total return, how does the Information Ratio help differentiate their performances?
Explanation:
The correct answer is (b) It considers risk, revealing the portfolio with lower risk-adjusted returns. The Information Ratio takes into account both total return and the level of risk taken to achieve that return. In situations with the same total return, the Information Ratio helps identify the portfolio with better risk-adjusted performance.
Explanation:
The correct answer is (b) It considers risk, revealing the portfolio with lower risk-adjusted returns. The Information Ratio takes into account both total return and the level of risk taken to achieve that return. In situations with the same total return, the Information Ratio helps identify the portfolio with better risk-adjusted performance.
Consider a scenario where a portfolio manager achieves a high total return but also incurs substantial volatility. How might this impact the Information Ratio?
Explanation:
The correct answer is (b) The Information Ratio will be low, suggesting weak risk-adjusted performance. A high total return alone does not guarantee a high Information Ratio; it also depends on the level of risk taken. If the volatility is substantial, the risk-adjusted performance may be weaker, resulting in a lower Information Ratio.
Explanation:
The correct answer is (b) The Information Ratio will be low, suggesting weak risk-adjusted performance. A high total return alone does not guarantee a high Information Ratio; it also depends on the level of risk taken. If the volatility is substantial, the risk-adjusted performance may be weaker, resulting in a lower Information Ratio.
In the context of the Information Ratio, why is benchmark selection crucial for accurate assessment?
Explanation:
The correct answer is (c) Different benchmarks may lead to different assessments of risk-adjusted performance. The Information Ratio compares a portfolio’s performance to a chosen benchmark. Selecting an inappropriate benchmark can result in a misleading assessment of the portfolio’s risk-adjusted performance. Therefore, benchmark selection is crucial for accurate evaluation.
Explanation:
The correct answer is (c) Different benchmarks may lead to different assessments of risk-adjusted performance. The Information Ratio compares a portfolio’s performance to a chosen benchmark. Selecting an inappropriate benchmark can result in a misleading assessment of the portfolio’s risk-adjusted performance. Therefore, benchmark selection is crucial for accurate evaluation.
What does the Sharpe Ratio measure in the context of risk-adjusted investment returns?
Explanation:
The correct answer is (a) Total return relative to a benchmark. The Sharpe Ratio assesses the risk-adjusted performance of an investment portfolio by measuring the excess return (total return minus the risk-free rate) per unit of portfolio volatility.
Explanation:
The correct answer is (a) Total return relative to a benchmark. The Sharpe Ratio assesses the risk-adjusted performance of an investment portfolio by measuring the excess return (total return minus the risk-free rate) per unit of portfolio volatility.
Mr. Anderson has a portfolio with a Sharpe Ratio of 1.2, while Ms. Carter has a portfolio with a Sharpe Ratio of 0.8. What does this indicate about their respective performances?
Explanation:
The correct answer is (a) Mr. Anderson outperformed Ms. Carter. A higher Sharpe Ratio indicates better risk-adjusted performance. Therefore, Mr. Anderson, with a Sharpe Ratio of 1.2, outperformed Ms. Carter, who has a Sharpe Ratio of 0.8.
Explanation:
The correct answer is (a) Mr. Anderson outperformed Ms. Carter. A higher Sharpe Ratio indicates better risk-adjusted performance. Therefore, Mr. Anderson, with a Sharpe Ratio of 1.2, outperformed Ms. Carter, who has a Sharpe Ratio of 0.8.
Consider two investment portfolios: Portfolio A has a Sharpe Ratio of 0.9, and Portfolio B has a Sharpe Ratio of 1.5. What can be inferred about the risk-adjusted performance of these portfolios?
Explanation:
The correct answer is (b) Portfolio B has higher risk-adjusted performance. A higher Sharpe Ratio indicates better risk-adjusted performance. Therefore, Portfolio B, with a Sharpe Ratio of 1.5, has superior risk-adjusted performance compared to Portfolio A.
Explanation:
The correct answer is (b) Portfolio B has higher risk-adjusted performance. A higher Sharpe Ratio indicates better risk-adjusted performance. Therefore, Portfolio B, with a Sharpe Ratio of 1.5, has superior risk-adjusted performance compared to Portfolio A.
In the context of the Sharpe Ratio, what does a negative value indicate?
Explanation:
The correct answer is (a) The portfolio underperformed the benchmark. A negative Sharpe Ratio suggests that the portfolio failed to generate excess returns compared to a risk-free investment, indicating underperformance.
Explanation:
The correct answer is (a) The portfolio underperformed the benchmark. A negative Sharpe Ratio suggests that the portfolio failed to generate excess returns compared to a risk-free investment, indicating underperformance.
Suppose an investor is assessing two mutual funds. Fund X has a Sharpe Ratio of 0.7, and Fund Y has a Sharpe Ratio of -0.2. What conclusion can be drawn about these funds?
Explanation:
The correct answer is (a) Fund X outperformed Fund Y on a risk-adjusted basis. A positive Sharpe Ratio indicates better risk-adjusted performance, so Fund X, with a Sharpe Ratio of 0.7, outperformed Fund Y, which has a negative Sharpe Ratio.
Explanation:
The correct answer is (a) Fund X outperformed Fund Y on a risk-adjusted basis. A positive Sharpe Ratio indicates better risk-adjusted performance, so Fund X, with a Sharpe Ratio of 0.7, outperformed Fund Y, which has a negative Sharpe Ratio.
In the context of the Sharpe Ratio, what is the significance of a higher value?
Explanation:
The correct answer is (b) It suggests better risk-adjusted performance. A higher Sharpe Ratio indicates that the portfolio is achieving a higher excess return per unit of risk, implying superior risk-adjusted performance.
Explanation:
The correct answer is (b) It suggests better risk-adjusted performance. A higher Sharpe Ratio indicates that the portfolio is achieving a higher excess return per unit of risk, implying superior risk-adjusted performance.
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