SIE Economic Factors and Business Cycles 3

Question 1

Which type of investment risk cannot be eliminated through diversification because it affects the entire market?

Accepted Answer

Systematic risk

Answer

Credit risk

Answer

Business risk

Answer

Liquidity risk

Question 2

Purchasing power risk (inflation risk) in investing refers to:

Accepted Answer

The risk that rising prices will erode the real value of investment returns over time

Answer

The risk that a bond issuer will default on payments

Answer

The risk that interest rates will change and affect bond prices

Answer

The risk of being unable to sell an investment quickly at a fair price

Question 3

The general relationship between risk and expected return in investments holds that:

Accepted Answer

Higher-risk investments must offer higher potential returns to attract investors

Answer

Higher-risk investments tend to offer lower potential returns to compensate investors

Answer

Risk and expected return have no meaningful relationship

Answer

Lower-risk investments always deliver the best long-term returns

Question 4

Interest rate risk most directly and significantly affects which type of investment?

Accepted Answer

Long-term fixed-rate bonds

Answer

Common equity shares of growth companies

Answer

Commodity futures contracts

Answer

Short-term commercial real estate leases

Question 5

Credit risk in the context of fixed income investing is best described as:

Accepted Answer

The risk that an issuer will fail to make scheduled principal or interest payments

Answer

The risk that rising interest rates will lower the market price of a bond

Answer

The risk that inflation will reduce the purchasing power of bond payments

Answer

The risk that a bond cannot be sold quickly in the secondary market

Question 6

Diversification of a portfolio is most effective at reducing which type of risk?

Accepted Answer

Non-systematic (unsystematic) risk

Answer

Systematic (market) risk

Answer

Interest rate risk

Answer

Inflation risk

Question 7

Which economic development would most likely cause broad stock market prices to rise across multiple sectors?

Accepted Answer

A reduction in interest rates by the Federal Reserve

Answer

A significant increase in the national unemployment rate

Answer

A sharp decline in corporate earnings across industries

Answer

A sustained increase in consumer price inflation