False Equations in CTFA Exam

D

The correct answer to this question is D. Total risk = un-diversified risk + equity risk is the false equation.

Explanation:

Total risk is the overall risk of an investment, which includes various types of risks associated with it. The four types of risks that contribute to total risk are general risk, specific risk, market risk, and issuer risk. Additionally, the total risk can also be divided into two types of risk: systematic risk and nonsystematic risk.

• General risk is the risk that is associated with the overall market or economy and cannot be diversified away.
• Specific risk is the risk that is associated with a particular company or investment and can be diversified away by investing in a portfolio of assets.
• Market risk is the risk that is associated with overall market movements and cannot be diversified away.
• Issuer risk is the risk that is associated with the specific company issuing the investment, such as default risk or credit risk.
• Systematic risk is the risk that is inherent in the overall market or economy and cannot be diversified away.
• Nonsystematic risk is the risk that is specific to an individual investment and can be diversified away.

Equity risk is the risk associated with investing in the stock market, and it is a type of un-diversified risk. The term "un-diversified risk" refers to the risk that cannot be diversified away by investing in a portfolio of assets.

Therefore, the equation "Total risk = un-diversified risk + equity risk" is false because un-diversified risk is a component of equity risk and not a separate type of risk. The other equations, A, B, and C, are all true and accurate representations of the different components of total risk.