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Exam ICWIM Topic 1 Question 71 Discussion

Actual exam question for CISI's ICWIM exam
Question #: 71
Topic #: 1
According to modern portfolio theory, when a portfolio is effectively diversified:

Suggested Answer: B Vote an answer

Modern portfolio theory distinguishes between systematic risk and unsystematic risk. Systematic risk is market-wide risk that affects most assets, such as recession risk, inflation shocks, or broad interest rate changes. This type of risk cannot be eliminated simply by holding more securities because it is driven by common economic factors. Unsystematic risk, also called specific or idiosyncratic risk, relates to individual companies, sectors, or issuers, such as management failure, product issues, litigation, or a single borrower default. Effective diversification reduces unsystematic risk because the negative impact of one holding is offset by other holdings that are not perfectly correlated. As the number of holdings increases and exposures are spread across sectors and issuers, the portfolio's specific risk is diluted, leaving the investor primarily exposed to systematic risk. CISI questions often test this exact distinction and the implication that diversification is a risk-reduction tool, but it does not remove market risk. The operational and inherent risk options are distractors and do not describe the core MPT risk decomposition.

by Kerr at Jul 06, 2026, 10:48 AM

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Here are all the actual test exam dumps for IT exams. Most people prepare for the actual exams with our test dumps to pass their exams. So it's critical to choose and actual test pdf to succeed.

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