Practice Quiz

FRM Financial Risk Manager Practice Test - Question List

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31. The CAPM decomposes a portfolio’s risk into systematic risk and specific risk. However the CAPM model only compensates investors for taking systematic risk, not specific risk. Why is this the case?
  1. Because the CAPM favors systematic risk.
  2. Because systematic is diversifiable, while specific risk is undiversifiable.
  3. Because systematic is undiversifiable, while specific risk is diversifiable.
  4. Because investors only accept systematic risk, not specific risk.
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32. The CAPM decomposes a portfolio's risk into systematic risk and specific risk. What is the difference between systematic risk and specific risk?
  1. Systematic risk is the risk of holding the market portfolio and specific risk is the risk which is unique to an individual asset.
  2. Both risks correlate with movements in the market.
  3. Systematic risk can be diversified away while specific risk cannot be.
  4. There is no difference between them.
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33. Beta β is the measure of systematic risk and it can be applied to market timing. Consider the following situation: Mike is an investor and he expects that the market will go down. How should he react to the expectation?
  1. He wants to move into higher beta stocks.
  2. He wants less exposure to the stock market and hence should buy stocks with lower betas.
  3. He will not do anything because the market will go up and it will not affect his situation.
  4. He will not invest anymore because he loses confidence in the market.
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34. What of the following assumptions is NOT true when conducting analysis using CAPM model?
  1. Market is frictional.
  2. Expectations are homogeneous.
  3. Investors hold risky assets in the same proportions. Their CML is the same and they all have market portfolio M.
  4. Market is in equilibrium.
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35. In finance, the beta of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. When an asset has a beta value of 0, which of the following is true?
  1. The asset’s price is not at all correlated with the market or the asset is independent of market.
  2. The asset generally follows the market.
  3. The asset inversely follows the market, but it generally decreases in value if the market goes up and vice versa.
  4. None of the above is true.
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