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Basic Question 8 of 8
Since systematic risk cannot be diversified away, how can portfolios have different degrees of risk?
B. Some portfolios are less efficient than others.
C. All efficient portfolios have the same amount of systematic risk; it is just that we have so much random error that some portfolios look less risky than others.
D. They don't. All portfolios on the CML have the same degree of systematic risk, since they all are made up of the market portfolio and the riskless asset.
A. Systematic risk is a function covariance of a portfolio's returns with the returns of the market. Forming portfolios that have a low (high) covariance with the market will have low (high) systematic risk.
B. Some portfolios are less efficient than others.
C. All efficient portfolios have the same amount of systematic risk; it is just that we have so much random error that some portfolios look less risky than others.
D. They don't. All portfolios on the CML have the same degree of systematic risk, since they all are made up of the market portfolio and the riskless asset.
User Contributed Comments 3
| User | Comment |
|---|---|
| jpducros | Systematic risks looks very similar to the definition of the Beta...is it the same ? |
| vinooka | Not exactly...systmatic risk is an absolute measure i.e.,Cov(i,M)..where i is an investment and M is market. Beta is a standardized relative measure -> Cov(i,M)/var(M) |
| johntan1979 | Yup, the formula of beta (systematic risk). Lower covariance with the market reduces the numerator, hence reducing the systematic risk, and vice versa. |
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Learning Outcome Statements
explain systematic and nonsystematic risk, including why an investor should not expect to receive additional return for bearing nonsystematic risk
CFA® 2025 Level I Curriculum, Volume 2, Module 2.