SIE Exam Question 108: Answer and Explanation

Question: 108

What type of risk involves the chance that Congress will make unfavorable changes in tax laws?

• A. Market risk
• B. Event risk
• C. Tax risk
• D. Liquidity risk

Correct Answer: C

Explanation:

Tax risk is the risk that the state or federal governments will make unfavorable changes to tax law. Market risk is the potential for loss due to the performance of the financial market. Event risk is the risk of an unexpected event negatively affecting an investment's value. Liquidity risk is the risk that an investor, firm, or institution may suffer a capital loss from having to liquidate assets at an unfavorable time (e.g., selling off assets at lower prices because funds are needed immediately).