Which of the following statements most accurately illustrates the implications

Which of the following statements most accurately

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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.
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CFA Level I Mock Exam 3 – Solutions (AM) FinQuiz.com © 2017 -­ All rights reserved. 86 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.
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