SIE Exam Question 96: Answer and Explanation

Question: 96

Investing in multiple investment vehicles within a portfolio to reduce risk or increase returns is called _______________.

• A. Dollar cost averaging
• B. Discounting
• C. Diversification
• D. Distribution

Correct Answer: C

Explanation:

Investing in multiple investment vehicles within a portfolio to reduce risk or increase returns is called diversification. An investor engages in dollar-cost averaging by purchasing a fixed-dollar amount of a given security at set intervals, such as monthly, to smooth out the volatility. Discounting involves calculating the net present value of a distribution of funds that is to take place in the future. A distribution is the payout (interest, dividend, etc.) from an investment.