Introduction
Welcome to Investment Risks, the unit that ties together everything you have learned about securities products by examining the risks that come with owning them.
Exam Weight: Part of 33 questions (44% of the SIE exam)
What You'll Learn
- Why risk and return are inseparable and how to think about investment risk
- How the possibility of losing your principal investment defines capital risk
- How credit risk reflects the chance that a bond issuer defaults on payments
- How inflation erodes purchasing power and which investments are most vulnerable
- How rising and falling interest rates affect bond prices inversely
- Why falling rates create the risk of reinvesting income at lower yields
- How early loan repayments affect mortgage-backed securities investors
- How exchange rate fluctuations affect international investments
- How easily an investment can be bought or sold without affecting its price
- How broad market movements affect all securities regardless of quality
- How company-specific and industry-specific risks can be reduced through diversification
- How government instability and policy changes create sovereign risk
- How spreading investments across asset classes reduces overall portfolio risk
- How periodic rebalancing maintains your target asset allocation
- How options and other instruments can protect against specific risks
Why This Matters
Every investment recommendation starts with understanding risk. The SIE exam tests whether you can identify which risks apply to specific securities, explain how different risks relate to each other, and describe the strategies investors use to manage them. Many of these concepts reappear in the Series 7 and Series 66 exams, so building a solid foundation here will help you on those exams too.
Let's start with the big picture: what risk actually means and why it matters.