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- Topic: A CFA question from the 1994 study guide
| Author | Topic: A CFA question from the 1994 study guide |
|---|---|
| shaz007 @2004-10-28 09:36:18 |
Hi, This question is from a 1994 Level 1 CFA Study Guide- Briefly explain whether investors should expect a higher return from holding Portfolio A versus portfolio B under capital assest pricing theory(CAPM). Assume that both portfolios are fully diversified. Portfolio A- Systemic (Beta) 1.0 Specific risk each individuial security- High. Portfolio B- Systemic (Beta) 1.0 Specific risk eah individual security-Low. Could some one please give me the answer (like i know its Portfolio A- but why) or tell me if there is any where on the net where there are old study guide CFA answers. Thanks so much!!! Sharon :) |
| Matt @2004-11-01 00:17:14 |
The systematic risk is the risk associated with the overall market in general. The non-systematic risk is unique to each individual security and is a function of the risk inherent in the business model / operations / industry. The total beta is a function of both the systematic and non-systematic risk of the security or portfolio. Therefore, higer non-systematic risk will increase the total beta of the portfolio, increasing the volatility and the required return. CAPM = Risk-free rate + Beta*(Market risk premium + Risk-free rate). Don't know if this is a good explanation but getting a grasp on the different elements of Beta may be helpful. |
