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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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Question 1 of 30
1. Question
What is the primary distinction between systematic risk and unsystematic risk in the context of investments?
Correct
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.Incorrect
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. -
Question 2 of 30
2. Question
In a situation where a company’s stock price is primarily influenced by changes in overall market conditions, what type of risk is predominant?
Correct
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.Incorrect
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. -
Question 3 of 30
3. Question
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?
Correct
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.Incorrect
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. -
Question 4 of 30
4. Question
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?
Correct
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.Incorrect
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. -
Question 5 of 30
5. Question
How might changes in interest rates impact the classification of risks in an investment portfolio?
Correct
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.Incorrect
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. -
Question 6 of 30
6. Question
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?
Correct
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.Incorrect
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. -
Question 7 of 30
7. Question
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?
Correct
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.Incorrect
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. -
Question 8 of 30
8. Question
In a hypothetical situation where an investor has successfully diversified their portfolio, what impact would this have on the overall risk profile?
Correct
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.Incorrect
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. -
Question 9 of 30
9. Question
What is the primary purpose of diversification in investment portfolios?
Correct
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.Incorrect
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. -
Question 10 of 30
10. Question
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?
Correct
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.Incorrect
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. -
Question 11 of 30
11. Question
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?
Correct
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.Incorrect
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. -
Question 12 of 30
12. Question
In a hypothetical situation where an investor adds international securities to their portfolio, how might this contribute to risk reduction?
Correct
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.Incorrect
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. -
Question 13 of 30
13. Question
Mr. Anderson is considering diversifying his investment portfolio. Which of the following actions would be most effective in achieving diversification?
Correct
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.Incorrect
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. -
Question 14 of 30
14. Question
How does diversification address unsystematic risk in a portfolio?
Correct
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.Incorrect
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. -
Question 15 of 30
15. Question
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?
Correct
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.Incorrect
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. -
Question 16 of 30
16. Question
In a situation where an investor only holds assets that are highly correlated with each other, what is the likely impact on risk?
Correct
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.Incorrect
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. -
Question 17 of 30
17. Question
What does the Information Ratio measure in the context of risk-adjusted investment returns?
Correct
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.Incorrect
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. -
Question 18 of 30
18. Question
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?
Correct
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.Incorrect
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. -
Question 19 of 30
19. Question
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?
Correct
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.Incorrect
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. -
Question 20 of 30
20. Question
In the context of the Information Ratio, what does a negative value indicate?
Correct
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.Incorrect
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. -
Question 21 of 30
21. Question
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?
Correct
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.Incorrect
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. -
Question 22 of 30
22. Question
In a scenario where two portfolios have the same total return, how does the Information Ratio help differentiate their performances?
Correct
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.Incorrect
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. -
Question 23 of 30
23. Question
Consider a scenario where a portfolio manager achieves a high total return but also incurs substantial volatility. How might this impact the Information Ratio?
Correct
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.Incorrect
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. -
Question 24 of 30
24. Question
In the context of the Information Ratio, why is benchmark selection crucial for accurate assessment?
Correct
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.Incorrect
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. -
Question 25 of 30
25. Question
What does the Sharpe Ratio measure in the context of risk-adjusted investment returns?
Correct
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.Incorrect
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. -
Question 26 of 30
26. Question
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?
Correct
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.Incorrect
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. -
Question 27 of 30
27. Question
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?
Correct
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.Incorrect
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. -
Question 28 of 30
28. Question
In the context of the Sharpe Ratio, what does a negative value indicate?
Correct
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.Incorrect
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. -
Question 29 of 30
29. Question
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?
Correct
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.Incorrect
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. -
Question 30 of 30
30. Question
In the context of the Sharpe Ratio, what is the significance of a higher value?
Correct
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.Incorrect
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.
