SIE Exam Question 428: Answer and Explanation

Question: 428

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

• A. Kim, whose portfolio is a mix of blue chip and small cap securities
• B. Bill, whose portfolio is composed primarily of U.S. Treasury bonds
• C. Sarah, 75% of whose portfolio is made up of dividend-paying stocks
• D. Steve, whose portfolio consists mainly of U.S. Treasury bills and bank CDs

Correct Answer: B

Explanation:

B: Fixed-income investors are more exposed to inflationary risk than equity investors. Thus, both Steve and Bill will be exposed to this type of risk. However, the degree of inflationary risk is higher for longer term investments. Since Steve's portfolio consists of securities that will expire within a year and Bill's does not, Bill's portfolio has more inflationary risk than Steve's.