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SIE investment risk practice questions

Free SIE exam questions on investment risks: systematic vs unsystematic risk, interest rate, inflation, credit, liquidity, call and currency risk, and how diversification and allocation manage them.

Tap an answer to check it, or open "Show the answer and rationale" under each question. Customers in the questions are fictional. Exam practice only, not investment advice.

Question 1 of 20

Shares of a retailer drop 30% after its CEO resigns amid an accounting scandal, while the market is flat. This illustrates:

  1. Unsystematic risk
  2. Purchasing power risk
  3. Reinvestment risk
  4. Systematic risk
Show the answer and rationale

Answer: A

The loss came from an event at one company, so it is unsystematic (business) risk. A flat market rules out systematic risk, and inflation and reinvestment are unrelated.

📚 Learn it: The Risk You Can Diversify and the Risk You Can't

Question 2 of 20

When market interest rates rise, prices of existing fixed-rate bonds generally:

  1. Rise, and their yields fall
  2. Fall, and their yields fall
  3. Fall, and their yields rise
  4. Stay the same until maturity
Show the answer and rationale

Answer: C

Prices and yields move in opposite directions: new bonds pay more, so older lower-paying bonds drop in price until their yield matches. Prices do not hold steady in the market until maturity.

📚 Learn it: Rates Up, Prices Down: Rate, Inflation and Reinvestment Risk

Question 3 of 20

Bonds rated below BBB by S&P (or Baa by Moody's) are generally called:

  1. Investment-grade bonds
  2. High-yield bonds
  3. Agency bonds
  4. Prime-grade bonds
Show the answer and rationale

Answer: B

Ratings below BBB/Baa are below investment grade, also called high-yield or junk. Investment grade is BBB/Baa and above; agency bonds are a type of issuer, not a rating tier.

📚 Learn it: Will They Pay, Can I Sell, Will They Call?

Question 4 of 20

A foreign government seizes the assets of companies in one industry, and their stocks collapse. This is an example of:

  1. Liquidity risk
  2. Political risk
  3. Reinvestment risk
  4. Timing risk
Show the answer and rationale

Answer: B

Losses caused by government action or instability in a country are political (country) risk. Liquidity, reinvestment and timing risk describe ease of sale, reinvesting cash flows and trade timing.

📚 Learn it: Currency, Country and the Rest of the Risk Zoo

Question 5 of 20

An investor buys a single mutual fund that holds only technology stocks. Which statement is most accurate?

  1. The fund removes all of its unsystematic risk automatically and for good
  2. The fund may leave the investor concentrated in one sector
  3. The fund guarantees adequate diversification under SEC rules
  4. The fund carries no market risk because it is managed
Show the answer and rationale

Answer: B

A sector fund holds many stocks but in one industry, so sector-specific risk remains. No fund removes all unsystematic risk by default, the SEC guarantees nothing, and every stock fund carries market risk.

📚 Learn it: Managing Risk: Allocate, Diversify, Rebalance, Hedge

Question 6 of 20

Compared with a low-beta stock, a high-beta stock tends to:

  1. Pay higher dividends to offset its extra volatility
  2. Swing more in both rising and falling markets
  3. Carry less risk because it outperforms the market
  4. Rise more in up markets and hold steady in down ones
Show the answer and rationale

Answer: B

High beta means larger moves in both directions relative to the market. It does not protect on the downside, implies nothing about dividends, and greater volatility means more, not less, market risk.

📚 Learn it: The Risk You Can Diversify and the Risk You Can't

Question 7 of 20

Over 20 years, which holding is most exposed to purchasing power risk?

  1. Shares of a growing company
  2. A portfolio of real estate stocks
  3. A diversified common stock fund
  4. A 20-year fixed-rate bond
Show the answer and rationale

Answer: D

A fixed-rate bond pays the same dollars for 20 years, so inflation steadily erodes what those payments buy. Stocks and real estate shares have potential to grow with the economy, though they carry other risks.

📚 Learn it: Rates Up, Prices Down: Rate, Inflation and Reinvestment Risk

Question 8 of 20

If a rating agency downgrades a company's bonds, their market price will most likely:

  1. Stay the same, since the coupon is fixed
  2. Fall, as investors demand a higher yield
  3. Rise, because the bonds become more liquid
  4. Rise, as the issuer must pay higher coupons
Show the answer and rationale

Answer: B

More perceived credit risk means buyers want a higher yield, so the price drops. Existing coupons do not change with a downgrade, and downgrades tend to reduce liquidity rather than improve it.

📚 Learn it: Will They Pay, Can I Sell, Will They Call?

Question 9 of 20

Congress removes a tax break that a particular industry relies on, and the industry's stocks drop. This illustrates:

  1. Market risk
  2. Legislative risk
  3. Liquidity risk
  4. Interest rate risk
Show the answer and rationale

Answer: B

A loss from a change in law is legislative (regulatory) risk. Market risk is broad, liquidity risk is about selling, and interest rate risk is about rate changes.

📚 Learn it: Currency, Country and the Rest of the Risk Zoo

Question 10 of 20

An investor's time horizon is:

  1. The trading hours during which orders can be entered
  2. The time it takes a trade to settle after execution
  3. The period before a bond can be called by its issuer
  4. How long the investor expects to invest to reach a goal
Show the answer and rationale

Answer: D

Time horizon is the expected span until the money is needed. Trading hours, settlement time and call protection are unrelated concepts.

📚 Learn it: Managing Risk: Allocate, Diversify, Rebalance, Hedge

Practice 10 more investment risks questions free →

A timed or tutor-mode set in the app, scored by SIE section, with every miss saved for review. Free, no sign-up needed.

Question 11 of 20

Which event is an example of systematic risk?

  1. A product recall at a single drug company
  2. A fraud scandal at one regional bank
  3. A strike that shuts one automaker's plants
  4. A recession that pulls down most stock prices
Show the answer and rationale

Answer: D

Systematic (market) risk affects the market broadly, as a recession does. A recall, a scandal and a strike at one company are unsystematic, company-specific events.

📚 Learn it: The Risk You Can Diversify and the Risk You Can't

Question 12 of 20

Compared with a 20-year bond paying a 5% coupon, a 20-year zero-coupon bond has:

  1. More interest rate risk and more reinvestment risk
  2. Less interest rate risk and more reinvestment risk
  3. Less interest rate risk and no reinvestment risk
  4. More interest rate risk and no reinvestment risk
Show the answer and rationale

Answer: D

With no coupons, a zero is the most rate-sensitive bond for its maturity and has no periodic payments to reinvest. The other combinations get one or both of those relationships backward.

📚 Learn it: Rates Up, Prices Down: Rate, Inflation and Reinvestment Risk

Question 13 of 20

Prepayment risk is most closely associated with:

  1. Common stocks
  2. Zero-coupon Treasury bonds
  3. Noncallable preferred stock
  4. Mortgage-backed securities
Show the answer and rationale

Answer: D

Homeowners refinance when rates fall, returning principal early to mortgage-backed holders. Stocks have no principal to prepay, and noncallable securities and zeros cannot be paid off early by the issuer.

📚 Learn it: Will They Pay, Can I Sell, Will They Call?

Question 14 of 20

Which investor faces the greatest capital risk?

  1. One buying call options that could expire worthless
  2. One buying Treasury bills held to maturity
  3. One holding an FDIC-insured bank certificate
  4. One holding a short-term investment-grade bond
Show the answer and rationale

Answer: A

Capital risk is the chance of losing the money invested; an option buyer can lose the entire premium if the option expires worthless. T-bills held to maturity, insured CDs within limits and short investment-grade bonds carry much less risk of principal loss.

📚 Learn it: Currency, Country and the Rest of the Risk Zoo

Question 15 of 20

A portfolio has drifted from its target. Without selling anything, how could the investor rebalance?

  1. Add new money to the overweight categories
  2. Move all new money into cash indefinitely
  3. Wait until the portfolio drifts even further
  4. Direct new contributions to underweight categories
Show the answer and rationale

Answer: D

Sending new money to the underweight categories gradually restores the target mix. Adding to overweight areas widens the drift, and parking cash or waiting does not rebalance.

📚 Learn it: Managing Risk: Allocate, Diversify, Rebalance, Hedge

Question 16 of 20

An index fund holding 500 large U.S. stocks remains most exposed to which risk?

  1. Systematic risk
  2. Single-company risk
  3. Unsystematic risk
  4. Default risk of one issuer
Show the answer and rationale

Answer: A

Broad diversification removes most company-specific risk, but the fund still moves with the market, so systematic risk remains. Single-company and single-issuer risks are what the 500 holdings dilute.

📚 Learn it: The Risk You Can Diversify and the Risk You Can't

Question 17 of 20

A savings account pays 1% a year while inflation runs 3%. Approximately what is the saver's real return?

  1. 2%
  2. −3%
  3. −2%
  4. 4%
Show the answer and rationale

Answer: C

Real return ≈ nominal return − inflation = 1% − 3% = −2%, a loss of purchasing power. 4% adds the rates, 2% has the sign reversed, and −3% ignores the interest earned.

📚 Learn it: Rates Up, Prices Down: Rate, Inflation and Reinvestment Risk

Question 18 of 20

Which issuer is generally considered to have the lowest credit risk?

  1. The U.S. Treasury
  2. A start-up technology firm
  3. A company rated BB
  4. A city rated A
Show the answer and rationale

Answer: A

Treasury securities are backed by the full faith and credit of the U.S. government and are treated as having minimal default risk. A start-up, a BB-rated company and even an A-rated city carry more credit risk.

📚 Learn it: Will They Pay, Can I Sell, Will They Call?

Question 19 of 20

A U.S. investor holds European stocks. If the U.S. dollar weakens against the euro, the holdings' value in dollars will, all else equal:

  1. Stay the same
  2. Rise
  3. Fall to zero
  4. Fall
Show the answer and rationale

Answer: B

A weaker dollar means each euro converts into more dollars, so euro-priced holdings are worth more in dollar terms. A stronger dollar would lower their dollar value.

📚 Learn it: Currency, Country and the Rest of the Risk Zoo

Question 20 of 20

Asset allocation means:

  1. Dividing a portfolio among categories such as stocks, bonds and cash
  2. Selling winning positions each year to lock in gains before taxes are due
  3. Buying a put option to protect a single stock against a decline
  4. Buying many stocks within a single industry to spread out company-specific risk
Show the answer and rationale

Answer: A

Asset allocation is the split among asset categories, based on time horizon and risk tolerance. Buying within one industry is limited diversification, selling winners is a tax tactic, and a protective put is hedging.

📚 Learn it: Managing Risk: Allocate, Diversify, Rebalance, Hedge

Practice 10 more investment risks questions free →

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