Which of the following statements most accurately

Which of the following statements most accurately illustrates the implications of
an asset class with negatively returns?
A. Portfolio standard deviation will be overestimated.
B. There is a higher than normal probability for extreme returns.
C. A majority of the return observations are concentrated to the left of the
mean.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 12, Reading 42, LOS b
A return distribution is negatively skewed if returns are not symmetric around the
mean and most of the returns fall to the right of the mean. A negatively skewed
distribution has a higher frequency of negative deviations from the mean, which
has the effect of overestimating standard deviation.
Kurtosis refers to fat tails or higher than normal probabilities for extreme returns.
120. In stressed market conditions:
A. risks arise independently and hardly interact with one another.
B. the combined risk compounds the individual risks in a linear manner.
C. the total risk faced is worse than the sum of the risks of the separate
components.

CFA Level I Mock Exam 3 – Solutions (AM)
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Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 41, LOS-f.
Option C is correct. In most adverse financial interactions, the whole is much
worse than the sum of its parts i.e. the combined risk compounds the individual
risks in a non-liner manner. Risks do not usually arise independently, but
generally interact with one another, a problem that is even more critical in
stressed market conditions.