A financial advisor is analyzing a client portfolio consisting exclusively of long-term U.S. Treasury bonds and a broad-market S&P 500 index ETF. The client believes that combining sovereign fixed-income debt with a highly diversified equity index renders the portfolio completely immune to broader economic downturns and rate changes. Which of the following statements correctly evaluate the systematic risks present in this portfolio? Select all that apply.
- Both the equity index fund and the long-term U.S. Treasury bond holdings remain exposed to systematic risks, which cannot be eliminated through asset allocation or broad diversification.Cevap
- BBroadening equity exposure by adding thousands of additional international stocks will fully eliminate the portfolio's overall market risk.
- An increase in prevailing market interest rates will depress the market value of the existing long-term Treasury bonds, demonstrating interest rate risk despite the absence of credit default risk.Cevap
- DU.S. Treasury securities carrying the full faith and credit of the federal government are inherently immune to purchasing power risk during prolonged inflationary cycles.
Cevap
The correct evaluation includes recognizing that both asset classes remain subject to non-diversifiable systematic risks, and acknowledging that long-term Treasury bonds face interest rate risk when rates rise despite having zero credit default risk.
Systematic risk encompasses market-wide factors such as interest rate risk, inflation risk, and general market downturns. Holding broad equity index funds and government bonds mitigates company-specific credit risks, but the equity portion remains subject to general market risk while long-term fixed-income holdings suffer price declines when interest rates rise.
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Systematic Risk and Non-Diversifiability
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