Financial Risk Manager Part 1
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A risk analyst at a bank is assessing modern portfolio theory (MPT) and the validity of applying MPT in asset pricing. The risk analyst begins by evaluating the assumptions underlying MPT. Which of the following is correct for the analyst to identify as a concern when applying MPT in practice?
A
MPT assumes that investors ignore the skewness of a return distribution.
B
MPT assumes that return distributions are asymmetric.
C
MPT assumes that asset returns can be explained by a small number of systematic factors that affect all securities.
D
MPT assumes that by using diversification, investors can eliminate both systematic and idiosyncratic risks from their portfolios.