FIA Portfolio Theory & Asset Management 4

Question 1

Which of the following is an example of unsystematic risk?

Accepted Answer

A product recall at a specific company

Answer

A company-specific product recall is unsystematic risk because it affects only that firm and can be diversified away.

Question 2

In the Security Market Line (SML), what is plotted on the x-axis?

Accepted Answer

Beta

Answer

The SML plots expected return against beta (systematic risk), unlike the CML which uses standard deviation.

Question 3

Which portfolio construction approach uses mean-variance optimization to select asset weights?

Accepted Answer

Markowitz optimization

Answer

Markowitz optimization selects asset weights by maximizing expected return for a given variance (or minimizing variance for a given return).

Question 4

What does a negative Jensen's alpha indicate about a portfolio manager's performance?

Accepted Answer

The portfolio underperformed relative to its expected CAPM return

Answer

Negative alpha means the portfolio delivered less return than CAPM would predict given its level of systematic risk.

Question 5

What is the primary benefit of international diversification in portfolio management?

Accepted Answer

Reduces portfolio risk by including assets with low correlation to domestic markets

Answer

International diversification adds assets with lower correlation to domestic markets, reducing overall portfolio risk.

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