Module: | MODULE B: RISK MANAGEMENT
Q338: Consider the following statements regarding the measurement of Systematic and Unsystematic Risk within a bank's equity portfolio:
1. Systematic risk cannot be eliminated through diversification and is mathematically measured by the Beta (β) coefficient of the portfolio relative to the market index.
2. Unsystematic risk is idiosyncratic to an individual issuer and can be significantly mitigated by holding a well-diversified basket of uncorrelated securities.
3. A portfolio with a Beta strictly greater than 1.0 implies that the portfolio's returns are less volatile than the broader market index.
2. Unsystematic risk is idiosyncratic to an individual issuer and can be significantly mitigated by holding a well-diversified basket of uncorrelated securities.
3. A portfolio with a Beta strictly greater than 1.0 implies that the portfolio's returns are less volatile than the broader market index.
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Systematic risk affects the entire market and cannot be diversified away.
It is measured by Beta (β), which quantifies the sensitivity of a portfolio's returns to the broader market index.
Statement 2 is correct: Unsystematic risk (idiosyncratic risk) is unique to a specific company or sector and can be significantly reduced or eliminated through effective diversification (holding uncorrelated assets). Statement 3 is incorrect: A Beta greater than 1.0 (e.g., 1.5) indicates that the portfolio is *more* volatile than the broader market (if the market moves 10%, the portfolio moves 15%). A Beta of less than 1.0 indicates less volatility than the market.
It is measured by Beta (β), which quantifies the sensitivity of a portfolio's returns to the broader market index.
Statement 2 is correct: Unsystematic risk (idiosyncratic risk) is unique to a specific company or sector and can be significantly reduced or eliminated through effective diversification (holding uncorrelated assets). Statement 3 is incorrect: A Beta greater than 1.0 (e.g., 1.5) indicates that the portfolio is *more* volatile than the broader market (if the market moves 10%, the portfolio moves 15%). A Beta of less than 1.0 indicates less volatility than the market.