SIE (Securities Industry Essentials) Practice Exam

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Diversification effectively mitigates which type of risk?

Interest rate risk
Currency risk
Business risk
Inflation risk

The correct answer is: Business risk

Diversification helps to mitigate business risk, also known as systematic risk, which affects an entire market or industry and cannot be controlled by an individual investor. Interest rate risk refers to the risk of interest rates changing and affecting the value of investments, which is not mitigated by diversification. Currency risk, or exchange rate risk, is the potential loss from fluctuations in currency exchange rates and is not mitigated by diversification either. Inflation risk occurs when the price of goods and services increases, and although diversification can help protect against this risk to some extent, it is not its main purpose. Therefore, the best answer is C Business risk.