Economic Factors and Business Cycles Flashcards
7 cards from real SIE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Economic Factors and Business Cycles flashcards as text
Which type of investment risk cannot be eliminated through diversification because it affects the entire market?
Answer: Systematic risk
Systematic (market) risk affects all securities in the market and cannot be diversified away because it stems from broad economic factors that impact all investments.
Purchasing power risk (inflation risk) in investing refers to:
Answer: The risk that rising prices will erode the real value of investment returns over time
Purchasing power risk is the danger that inflation will outpace investment returns, reducing the real (inflation-adjusted) value of the money earned or received.
The general relationship between risk and expected return in investments holds that:
Answer: Higher-risk investments must offer higher potential returns to attract investors
Investors demand higher potential returns as compensation for accepting greater risk; without this risk premium, rational investors would choose safer alternatives.
Interest rate risk most directly and significantly affects which type of investment?
Answer: Long-term fixed-rate bonds
Long-term fixed-rate bonds are most sensitive to interest rate changes because their fixed payments are locked in for many years, making price swings larger when rates move.
Credit risk in the context of fixed income investing is best described as:
Answer: The risk that an issuer will fail to make scheduled principal or interest payments
Credit risk (also called default risk) is the possibility that a bond issuer will be unable or unwilling to make the promised interest and principal payments.
Diversification of a portfolio is most effective at reducing which type of risk?
Answer: Non-systematic (unsystematic) risk
Diversification reduces non-systematic risk — company or industry-specific risks — because losses in one holding tend to be offset by gains in others when risks are uncorrelated.
Which economic development would most likely cause broad stock market prices to rise across multiple sectors?
Answer: A reduction in interest rates by the Federal Reserve
Declining interest rates reduce borrowing costs for businesses, increase the present value of future earnings, and make stocks more attractive relative to bonds, driving prices higher.