Practice Quiz

FRM Financial Risk Manager Practice Test

Category - The Capital Asset Pricing Model

Start a Study Session Sign up for Question of the Day
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.
Explanation
Systematic risk is the risk of holding the market portfolio and specific risk is the risk unique to an individual asset. While systematic risk correlates with movements in the market, specific risk is uncorrelated with the market’s movements.

Key Takeaway: Because systematic risk is a risk of an entire market, it cannot be diversified away, while specific risk can be. Diversification helps an investor reduce market risk simply by investing in many unrelated assets that do not have correlated specific risk.
Previous Next
Was this helpful? Upvote!
Login to contribute your own answer or details
Start a Study Session Sign up for Question of the Day

Top questions

Related questions

Most popular on PracticeQuiz