SIE (Securities Industry Essentials) Practice Exam

Which of the following investors would be most subject to inflation risk?

1. Jenny, who is invested in high-yield corporate bonds

2. Bill, whose portfolio is composed primarily of U.S. Treasury bonds

3. Tom, who holds a diversified portfolio of international stocks

4. Sara, who invests heavily in commodities like gold and oil

The correct answer is: Bill, whose portfolio is composed primarily of U.S. Treasury bonds

Bill, whose portfolio is composed primarily of U.S. Treasury bonds, would be most subject to inflation risk. This is because inflation reduces the purchasing power of fixed income investments, such as bonds. As inflation increases, the fixed interest rate on bonds becomes less valuable, resulting in a decrease in the investor's return. Jenny, who is invested in high-yield corporate bonds, may also be subject to inflation risk as corporate bonds are influenced by the overall economy and inflation can impact a company's ability to pay back its debt. Tom, who holds a diversified portfolio of international stocks, would have some exposure to inflation risk as international markets are also impacted by inflation. However, diversified investments can help mitigate the effects of inflation on the overall portfolio. Sara, who invests heavily in commodities like gold and oil, would not be as subject to inflation risk as these commodities tend to rise in value during inflationary periods. However, investing solely in commodities can also be risky as their values can be volatile and not all commodities may perform well during inflation.