Introduction

Welcome to Investment Risks and Returns - the unit that builds your framework for understanding what can go wrong with investments, what investors earn, what must be disclosed, and what it all costs.

Exam Weight: Part of Function 3 (73% of exam) - Chapter 7 covers approximately 15 questions

What You'll Learn

In this unit, you'll cover:

• Types of Investment Risk: Systematic vs. nonsystematic risk, call risk, reinvestment risk, timing risk, liquidity risk, prepayment/extension risk, and opportunity cost
• Types of Investment Returns: Return of capital, tax-exempt interest, taxable income, and total return
• Required Disclosures: Material facts, the Statement of Additional Information, material events, and control relationships
• Costs and Fees: Markups, commissions, share classes, 12b-1 fees, surrender charges, M&E charges, fee-based accounts, and soft dollar arrangements
• Investor Protection: FINRA Rule 2165 and temporary holds for financial exploitation of specified adults

Why This Matters

Every investment recommendation carries risk, generates returns, and comes with costs. The Series 7 exam tests whether you understand these three dimensions and can identify which risks, returns, and fees apply to specific products and scenarios. You also need to know what must be disclosed to customers and how firms protect vulnerable investors.

This unit ties together concepts from across the exam: bonds, equities, mutual funds, variable products, and municipal securities all appear here through the lens of risk, return, and cost.

Let's start with the foundation: the types of risk that every investor faces.