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

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.

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

Purchasing power risk is the danger that inflation will outpace investment returns, reducing the real (inflation-adjusted) value of the money earned or received.

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

Investors demand higher potential returns as compensation for accepting greater risk; without this risk premium, rational investors would choose safer alternatives.

Question 4

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

Accepted Answer

Long-term fixed-rate bonds

Answer

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.

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

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.

SIE - Securities Industry Essentials Practice Test

SIE - Securities Industry Essentials Practice Test

SIE Economic Factors and Business Cycles 3