SIE (Securities Industry Essentials) Practice Exam

Which of the following terms refers to a diversified security often organized as a separate company?

1. Mutual fund

2. Stock option

3. Bond

4. Certificate of Deposit

The correct answer is: Mutual fund

A mutual fund is a type of investment that pools money from many investors to purchase a variety of securities. The purpose of a mutual fund is to diversify investments in order to reduce risk. This is done by investing in a range of securities from different companies, industries, and geographic locations. Therefore, a mutual fund is a type of diversified security organized as a separate company. Stock options, bonds, and certificates of deposit are not necessarily organized as separate companies. Stock options are contracts that give the holder the right, but not the obligation, to buy or sell a particular stock at a predetermined price. Bonds are debt securities issued by companies or governments, and certificates of deposit are savings certificates issued by banks. While all three of these can also be considered types of investments, they are not typically organized as separate companies in the same way that a mutual fund is.