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Certified Information Systems Auditor

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NEW QUESTION: 1
Which of the following statements about portfolio management is TRUE?
A. As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches negative one.
B. Combining the capital market line (CML) (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from the decision of what to invest in.
C. The security market line (SML) measures systematic and unsystematic risk versus expected return; the CML measures total risk.
D. The expected return on a 0 beta security is the expected market return.
Answer: B
Explanation:
Explanation/Reference:
Explanation:
Combining the CML (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from what to invest in and is called the separation theorem. The investment selection process is thus simplified from stock picking to efficient portfolio construction through diversification.
The other statements are false. As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches positive one. (Remember that the market portfolio has no unsystematic risk). The SML measures systematic risk, or beta risk. The expected return on a 0 beta security is the risk free rate (the market premium term has a value of 0).

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