# P2.T8. Investment Management

Practice questions for investment management and risk management

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1. ### Question 9: Fama-French factor

Question: Jaeger argues that even if broad market neutrality is achieved, a manager is potentially exposed to several "beta-type" risk factors. Which of the following is not a Fama-French factor? A. Value stocks (low price to book) B. Small capitalization stocks C. Momentum factors D. Low liquidity factors Answer: D Explanation: While liquidity may indeed by a factor, the...
Question: Jaeger argues that even if broad market neutrality is achieved, a manager is potentially exposed to several "beta-type" risk factors. Which of the following is not a Fama-French factor? A. Value stocks (low price to book) B. Small capitalization stocks C. Momentum factors D. Low liquidity factors Answer: D Explanation: While liquidity may indeed by a factor, the...
Question: Jaeger argues that even if broad market neutrality is achieved, a manager is potentially exposed to several "beta-type" risk factors. Which of the following is not a Fama-French factor? A. Value stocks (low price to book) B. Small capitalization stocks C. Momentum factors D. Low...
Question: Jaeger argues that even if broad market neutrality is achieved, a manager is potentially exposed to several "beta-type" risk factors. Which of the following is not a Fama-French factor? ...
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Hi srinivas, This is from the (difficult) section 7.5.2 in Chapter 7 of Jorion (Portfolio Risk: Analytical Methods). He says it comes from CAPM where: Return(i) - RF = [Return (Market) - RF]*beta(i), Excess return (i) = Excess return (market) * beta(i), such that Excess return (i) / beta(i) = Excess return (market) = constant The use of marginal VaR follows as they are so nearly...
Hi srinivas, This is from the (difficult) section 7.5.2 in Chapter 7 of Jorion (Portfolio Risk: Analytical Methods). He says it comes from CAPM where: Return(i) - RF = [Return (Market) - RF]*beta(i), Excess return (i) = Excess return (market) * beta(i), such that Excess return (i) / beta(i) = Excess return (market) = constant The use of marginal VaR follows as they are so nearly...
Hi srinivas, This is from the (difficult) section 7.5.2 in Chapter 7 of Jorion (Portfolio Risk: Analytical Methods). He says it comes from CAPM where: Return(i) - RF = [Return (Market) - RF]*beta(i), Excess return (i) = Excess return (market) * beta(i), such that Excess return (i) /...
Hi srinivas, This is from the (difficult) section 7.5.2 in Chapter 7 of Jorion (Portfolio Risk: Analytical Methods). He says it comes from CAPM where: Return(i) - RF = [Return (Market) -...
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3. ### Question 98: Porfolio risk

Question: When does portfolio risk reach a global minimum? A. Marginal VaRs are equal B. Marginal VaRs = 1.0 C. Highest Sharpe ratio D. (expected return/beta) is constant Answer: A Explanation: Keep in mind the EFFICIENT FRONTIER STARTS at the minimum risk portfolio (i.e., the portfolio with the lowest volatility) which here is the GLOBAL MINIMUM. Answers (C) and (D) refer to...
Question: When does portfolio risk reach a global minimum? A. Marginal VaRs are equal B. Marginal VaRs = 1.0 C. Highest Sharpe ratio D. (expected return/beta) is constant Answer: A Explanation: Keep in mind the EFFICIENT FRONTIER STARTS at the minimum risk portfolio (i.e., the portfolio with the lowest volatility) which here is the GLOBAL MINIMUM. Answers (C) and (D) refer to...
Question: When does portfolio risk reach a global minimum? A. Marginal VaRs are equal B. Marginal VaRs = 1.0 C. Highest Sharpe ratio D. (expected return/beta) is constant Answer: A Explanation: Keep in mind the EFFICIENT FRONTIER STARTS at the minimum risk portfolio (i.e., the...
Question: When does portfolio risk reach a global minimum? A. Marginal VaRs are equal B. Marginal VaRs = 1.0 C. Highest Sharpe ratio D. (expected return/beta) is constant Answer: A ...
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4. ### Question 97: Component VaR

Question: What is Jorion's recommendation to compute component VaR when the distribution is not elliptical? A. Use sample beta coefficient B. Use marginal VaR C. Uses positions linked to selected portfolio return D. You cannot (must at least be elliptical) Answer: C Explanation: The idea is to identify a portfolio return (based on sorted historical portfolio returns) that...
Question: What is Jorion's recommendation to compute component VaR when the distribution is not elliptical? A. Use sample beta coefficient B. Use marginal VaR C. Uses positions linked to selected portfolio return D. You cannot (must at least be elliptical) Answer: C Explanation: The idea is to identify a portfolio return (based on sorted historical portfolio returns) that...
Question: What is Jorion's recommendation to compute component VaR when the distribution is not elliptical? A. Use sample beta coefficient B. Use marginal VaR C. Uses positions linked to selected portfolio return D. You cannot (must at least be elliptical) Answer: C Explanation: The...
Question: What is Jorion's recommendation to compute component VaR when the distribution is not elliptical? A. Use sample beta coefficient B. Use marginal VaR C. Uses positions linked to...
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5. ### Question 96: Component VaR and percentage contribution

Question: A $100 million portfolio has a portfolio value at risk (VaR) of$30 million. A trader has a $10 million position where the beta of the trader's return with the portfolio's return is 0.8 and the position's marginal VaR is 0.24. What is the (i) the position's component VaR and (ii) the percentage contribution of the position to portfolio VaR? A. 1.2 millon and 4.0% B. 2.4 million... Question: A$100 million portfolio has a portfolio value at risk (VaR) of $30 million. A trader has a$10 million position where the beta of the trader's return with the portfolio's return is 0.8 and the position's marginal VaR is 0.24. What is the (i) the position's component VaR and (ii) the percentage contribution of the position to portfolio VaR? A. 1.2 millon and 4.0% B. 2.4 million...
Question: A $100 million portfolio has a portfolio value at risk (VaR) of$30 million. A trader has a $10 million position where the beta of the trader's return with the portfolio's return is 0.8 and the position's marginal VaR is 0.24. What is the (i) the position's component VaR and (ii) the... Question: A$100 million portfolio has a portfolio value at risk (VaR) of $30 million. A trader has a$10 million position where the beta of the trader's return with the portfolio's return is 0.8...
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6. ### Question 95: Formula

Question: If W is the portfolio value, (i) is an asset with a single risk factor, and (b) is the beta between the position's and the portfolio's returns, what is the formula for the best hedge? A. -W x [COV(i, portfolio) / variance of i] B. -W x [COV(i, portfolio) / standard deviation of i] C. -W x [variance of I / COV(i, portfolio)] D. (variance of i) x [COV(i, portfolio) / W] ...
Question: If W is the portfolio value, (i) is an asset with a single risk factor, and (b) is the beta between the position's and the portfolio's returns, what is the formula for the best hedge? A. -W x [COV(i, portfolio) / variance of i] B. -W x [COV(i, portfolio) / standard deviation of i] C. -W x [variance of I / COV(i, portfolio)] D. (variance of i) x [COV(i, portfolio) / W] ...
Question: If W is the portfolio value, (i) is an asset with a single risk factor, and (b) is the beta between the position's and the portfolio's returns, what is the formula for the best hedge? A. -W x [COV(i, portfolio) / variance of i] B. -W x [COV(i, portfolio) / standard deviation of i] ...
Question: If W is the portfolio value, (i) is an asset with a single risk factor, and (b) is the beta between the position's and the portfolio's returns, what is the formula for the best hedge? ...
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7. ### Question 94: Incremental VaR

Question: A $20 million portfolio consists of only two equally-weighted and uncorrelated positions in Assets A & B. Asset A ($10 million) has a volatility of 10% and Asset B (also $10 million) has a volatility of 20%. At 99% confidence, what is an approximation of the incremental VaR given an additional investment of$1 million in Asset B? A. $233,000 B.$298,000 C. $333,000 D.$416,000 ...
Question: A $20 million portfolio consists of only two equally-weighted and uncorrelated positions in Assets A & B. Asset A ($10 million) has a volatility of 10% and Asset B (also $10 million) has a volatility of 20%. At 99% confidence, what is an approximation of the incremental VaR given an additional investment of$1 million in Asset B? A. $233,000 B.$298,000 C. $333,000 D.$416,000 ...
Question: A $20 million portfolio consists of only two equally-weighted and uncorrelated positions in Assets A & B. Asset A ($10 million) has a volatility of 10% and Asset B (also $10 million) has a volatility of 20%. At 99% confidence, what is an approximation of the incremental VaR given an... Question: A$20 million portfolio consists of only two equally-weighted and uncorrelated positions in Assets A & B. Asset A ($10 million) has a volatility of 10% and Asset B (also$10 million) has...
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8. ### Question 93: Marginal VaR

Question: Which are true statements about marginal value at risk (VaR)? I. Marginal VaR = (critical value)[Covariance between position and portfolio returns/portfolio volatility]; II. Marginal VaR is a first-order partial derivative; III. Marginal VaR = (Portfolio VaR/Portfolio size)(beta of position's return with portfolio's return); IV. Marginal VaR approximates incremental VaR for small...
Question: Which are true statements about marginal value at risk (VaR)? I. Marginal VaR = (critical value)[Covariance between position and portfolio returns/portfolio volatility]; II. Marginal VaR is a first-order partial derivative; III. Marginal VaR = (Portfolio VaR/Portfolio size)(beta of position's return with portfolio's return); IV. Marginal VaR approximates incremental VaR for small...
Question: Which are true statements about marginal value at risk (VaR)? I. Marginal VaR = (critical value)[Covariance between position and portfolio returns/portfolio volatility]; II. Marginal VaR is a first-order partial derivative; III. Marginal VaR = (Portfolio VaR/Portfolio size)(beta of...
Question: Which are true statements about marginal value at risk (VaR)? I. Marginal VaR = (critical value)[Covariance between position and portfolio returns/portfolio volatility]; II. Marginal VaR...
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9. ### Question 92: Marginal VaR and component VaR

Question: A trader has a $10 million position in a$100 million portfolio where the beta of the trader's return with the portfolio's return is 1.5 and the portfolio value at risk (VaR) is $30 million. What is the (i) marginal VaR and (ii) component VaR? A. 0.2 and 2.0 million B. 0.2 and 2.8 million C. 0.45 and 4.5 million D. 1.2 and 2.4 million Answer: C Explanation: Marginal VaR =... Question: A trader has a$10 million position in a $100 million portfolio where the beta of the trader's return with the portfolio's return is 1.5 and the portfolio value at risk (VaR) is$30 million. What is the (i) marginal VaR and (ii) component VaR? A. 0.2 and 2.0 million B. 0.2 and 2.8 million C. 0.45 and 4.5 million D. 1.2 and 2.4 million Answer: C Explanation: Marginal VaR =...
Question: A trader has a $10 million position in a$100 million portfolio where the beta of the trader's return with the portfolio's return is 1.5 and the portfolio value at risk (VaR) is $30 million. What is the (i) marginal VaR and (ii) component VaR? A. 0.2 and 2.0 million B. 0.2 and 2.8... Question: A trader has a$10 million position in a $100 million portfolio where the beta of the trader's return with the portfolio's return is 1.5 and the portfolio value at risk (VaR) is$30...
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10. ### Question 91: Portfolios standard deviation

Question: A portfolio has five (5) positions with equal weights, standard deviations and correlations between them. If the standard deviation for each is 10% and the correlation between each pair of returns is 0.5, what is the portfolio's standard deviation? A. 5.0% B. 6.25% C. 7.75% D. 10.0% Answer: C Explanation: Under these circumstances, portfolio volatility = (asset...
Question: A portfolio has five (5) positions with equal weights, standard deviations and correlations between them. If the standard deviation for each is 10% and the correlation between each pair of returns is 0.5, what is the portfolio's standard deviation? A. 5.0% B. 6.25% C. 7.75% D. 10.0% Answer: C Explanation: Under these circumstances, portfolio volatility = (asset...
Question: A portfolio has five (5) positions with equal weights, standard deviations and correlations between them. If the standard deviation for each is 10% and the correlation between each pair of returns is 0.5, what is the portfolio's standard deviation? A. 5.0% B. 6.25% C. 7.75% D....
Question: A portfolio has five (5) positions with equal weights, standard deviations and correlations between them. If the standard deviation for each is 10% and the correlation between each pair...
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11. ### Question 90: Portfolio VaR

Question: Assume a two-asset portfolio with a portfolio value of $20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the desired confidence is 99%, what is the portfolio VaR if (i) the assets are uncorrelated [i.e.., correlation = 0] and (ii) the assets are perfectly correlated [i.e., correlation = -1] A.$2.56 and...
Question: Assume a two-asset portfolio with a portfolio value of $20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the desired confidence is 99%, what is the portfolio VaR if (i) the assets are uncorrelated [i.e.., correlation = 0] and (ii) the assets are perfectly correlated [i.e., correlation = -1] A.$2.56 and...
Question: Assume a two-asset portfolio with a portfolio value of $20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the desired confidence is 99%, what is the portfolio VaR if (i) the assets are uncorrelated [i.e..,... Question: Assume a two-asset portfolio with a portfolio value of$20 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. If the...
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12. ### Question 8: Strategies

Question: A manager takes a simultaneous long position in Google and short position in Yahoo, believing them to both have similar market exposure. This typifies which strategy? A. Long/short equity B. Equity market neutral C. Equity market timing D. Short selling Answer: B Explanation: Equity market neutral tries to exploit price discrepancies without exposure to the broad market...
Question: A manager takes a simultaneous long position in Google and short position in Yahoo, believing them to both have similar market exposure. This typifies which strategy? A. Long/short equity B. Equity market neutral C. Equity market timing D. Short selling Answer: B Explanation: Equity market neutral tries to exploit price discrepancies without exposure to the broad market...
Question: A manager takes a simultaneous long position in Google and short position in Yahoo, believing them to both have similar market exposure. This typifies which strategy? A. Long/short equity B. Equity market neutral C. Equity market timing D. Short selling Answer: B ...
Question: A manager takes a simultaneous long position in Google and short position in Yahoo, believing them to both have similar market exposure. This typifies which strategy? A. Long/short...
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13. ### Question 89: VaR

Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the individual VaR of Asset B? A.$822,000 B. $1.645 million C.$2.16 million D. $2.33 million Answer: B Explanation: The individual VaR of Asset... Question: Assume a two-asset portfolio with a portfolio value of$10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the individual VaR of Asset B? A. $822,000 B.$1.645 million C. $2.16 million D.$2.33 million Answer: B Explanation: The individual VaR of Asset...
Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the individual VaR of Asset B? A.$822,000 B. $1.645... Question: Assume a two-asset portfolio with a portfolio value of$10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The...
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14. ### Question 88: Diversified portfolio VaR

Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the diversified portfolio VaR under 95% confidence? A.$1.96 million B. $2.18 million C.$2.82 million D. $3.16 million Answer: B Explanation:... Question: Assume a two-asset portfolio with a portfolio value of$10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the diversified portfolio VaR under 95% confidence? A. $1.96 million B.$2.18 million C. $2.82 million D.$3.16 million Answer: B Explanation:...
Question: Assume a two-asset portfolio with a portfolio value of $10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The correlation between Asset A & B is 0.5. What is the diversified portfolio VaR under 95% confidence? A.... Question: Assume a two-asset portfolio with a portfolio value of$10 million. Each asset weighs 50% of the portfolio. Asset A has a volatility of 10% and asset B has a volatility of 20%. The...
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15. ### Question 87: Future strategies

Question: Jaeger claims that most systematic managed futures strategies are: A. Trend-followers B. Mean-reversion plays C. Volatility basis D. Basis risk based Answer: A Explanation: Trend-following is the dominant trading style for systematic manager futures strategies. The manager relies on technical indicators (e.g., momentum, relative size of moving averages, or break-out...
Question: Jaeger claims that most systematic managed futures strategies are: A. Trend-followers B. Mean-reversion plays C. Volatility basis D. Basis risk based Answer: A Explanation: Trend-following is the dominant trading style for systematic manager futures strategies. The manager relies on technical indicators (e.g., momentum, relative size of moving averages, or break-out...
Question: Jaeger claims that most systematic managed futures strategies are: A. Trend-followers B. Mean-reversion plays C. Volatility basis D. Basis risk based Answer: A Explanation: Trend-following is the dominant trading style for systematic manager futures strategies. The manager...
Question: Jaeger claims that most systematic managed futures strategies are: A. Trend-followers B. Mean-reversion plays C. Volatility basis D. Basis risk based Answer: A Explanation:...
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16. ### Question 86: Model globe macro strategies

Question: Jaeger says the key distinction between modern global macro strategies is: A. Fundamental versus technical B. Sector versus style C. Directional versus market-neutral D. Discretionary versus systematic Answer: D Explanation: Discretionary managers employ various "opportunistic" strategies (style drift is built-in); Systematic managers use well-defined trading models
Question: Jaeger says the key distinction between modern global macro strategies is: A. Fundamental versus technical B. Sector versus style C. Directional versus market-neutral D. Discretionary versus systematic Answer: D Explanation: Discretionary managers employ various "opportunistic" strategies (style drift is built-in); Systematic managers use well-defined trading models
Question: Jaeger says the key distinction between modern global macro strategies is: A. Fundamental versus technical B. Sector versus style C. Directional versus market-neutral D. Discretionary versus systematic Answer: D Explanation: Discretionary managers employ various...
Question: Jaeger says the key distinction between modern global macro strategies is: A. Fundamental versus technical B. Sector versus style C. Directional versus market-neutral D....
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17. ### Question 85: Risks

Question: A manager who employs a "Regulation D" strategy is exposed primarily to which risks: A. Credit and liquidity B. Liquidity and regulatory C. Regulatory and Market D. Market and operational Answer: A Explanation: Regulation D managers tend to invest in small companies with limited means to raise capital. The investment is illiquid before registration and limited in...
Question: A manager who employs a "Regulation D" strategy is exposed primarily to which risks: A. Credit and liquidity B. Liquidity and regulatory C. Regulatory and Market D. Market and operational Answer: A Explanation: Regulation D managers tend to invest in small companies with limited means to raise capital. The investment is illiquid before registration and limited in...
Question: A manager who employs a "Regulation D" strategy is exposed primarily to which risks: A. Credit and liquidity B. Liquidity and regulatory C. Regulatory and Market D. Market and operational Answer: A Explanation: Regulation D managers tend to invest in small companies with...
Question: A manager who employs a "Regulation D" strategy is exposed primarily to which risks: A. Credit and liquidity B. Liquidity and regulatory C. Regulatory and Market D. Market and...
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18. ### Question 84: Distressed securities strategy

Question: Challenges of employing a distressed securities strategy include all of the following except: A. Less liquidity B. Unfavorable image as "vultures" C. Require much expertise and extensive analysis D. Legal issues Answer: B Explanation: Distressed securities tend to be less liquid; require specialist expertise with much analytical pre-work involved; tend to be confronted...
Question: Challenges of employing a distressed securities strategy include all of the following except: A. Less liquidity B. Unfavorable image as "vultures" C. Require much expertise and extensive analysis D. Legal issues Answer: B Explanation: Distressed securities tend to be less liquid; require specialist expertise with much analytical pre-work involved; tend to be confronted...
Question: Challenges of employing a distressed securities strategy include all of the following except: A. Less liquidity B. Unfavorable image as "vultures" C. Require much expertise and extensive analysis D. Legal issues Answer: B Explanation: Distressed securities tend to be less...
Question: Challenges of employing a distressed securities strategy include all of the following except: A. Less liquidity B. Unfavorable image as "vultures" C. Require much expertise and...
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19. ### Question 83: Key exposure

Question: What is the key exposure (risk factor) in merger arbitrage? A. Deal risk premium B. Regulatory risk premium C. Model risk D. Spread risk Answer: A Explanation: The "deal risk premium" subsumes most of the other risks; "deal risk" includes everything that affects the deal's completion or its timing.
Question: What is the key exposure (risk factor) in merger arbitrage? A. Deal risk premium B. Regulatory risk premium C. Model risk D. Spread risk Answer: A Explanation: The "deal risk premium" subsumes most of the other risks; "deal risk" includes everything that affects the deal's completion or its timing.
Question: What is the key exposure (risk factor) in merger arbitrage? A. Deal risk premium B. Regulatory risk premium C. Model risk D. Spread risk Answer: A Explanation: The "deal risk premium" subsumes most of the other risks; "deal risk" includes everything that affects the deal's...
Question: What is the key exposure (risk factor) in merger arbitrage? A. Deal risk premium B. Regulatory risk premium C. Model risk D. Spread risk Answer: A Explanation: The "deal risk...
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20. ### Question 82: Risk in the CAPM

Question: If the capital asset pricing model (CAPM) were applied against a portfolio that employed an event-driven strategy, which risk in the CAPM would correspond to the manager's focus area: A. Equity premium B. Beta C. Idiosyncratic risk D. Quantity of risk Answer: C Explanation: Event-driven strategies are company-specific or idiosyncratic. Theoretically, as idiosyncratic...
Question: If the capital asset pricing model (CAPM) were applied against a portfolio that employed an event-driven strategy, which risk in the CAPM would correspond to the manager's focus area: A. Equity premium B. Beta C. Idiosyncratic risk D. Quantity of risk Answer: C Explanation: Event-driven strategies are company-specific or idiosyncratic. Theoretically, as idiosyncratic...
Question: If the capital asset pricing model (CAPM) were applied against a portfolio that employed an event-driven strategy, which risk in the CAPM would correspond to the manager's focus area: A. Equity premium B. Beta C. Idiosyncratic risk D. Quantity of risk Answer: C Explanation:...
Question: If the capital asset pricing model (CAPM) were applied against a portfolio that employed an event-driven strategy, which risk in the CAPM would correspond to the manager's focus area: ...
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