SIE Exam Question 22: Answer and Explanation

Question: 22

_____________ is the process of buying investment vehicles that have a high degree of uncertainty regarding their future value and expected earnings.

• A. Speculation
• B. Hedging
• C. Gambling
• D. Risk aversion

Correct Answer: A

Explanation:

Speculation is the process of buying investment vehicles that have a high degree of uncertainty regarding their future value and expected earnings. Hedging is an investment strategy that seeks to reduce the impact of negative movements in price of a security. Gambling is fundamentally different from investing in that it relies entirely on chance. Risk-averse, or conservative, investors are those who are willing to settle for lower rates of return on their investments in exchange for a lower risk of losing the principal they have invested.