SIE (Securities Industry Essentials) Practice Exam

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How can investors mitigate the risk of loss in a bearish market?

  1. By placing buy stop orders

  2. Investing in government bonds

  3. Placing sell stop orders

  4. Purchasing additional stock at a lower price

The correct answer is: Placing sell stop orders

Investors can mitigate the risk of loss in a bearish market by placing sell stop orders. This means setting a price at which the investment automatically sells, limiting potential losses. Option A, placing buy stop orders, would not be an effective strategy as it involves buying more of the investment as it decreases in value. Investing in government bonds (option B) may provide a safer investment, but it does not necessarily mitigate the risk of loss in a bearish market. Option D, purchasing additional stock at a lower price, also does not mitigate the risk of loss as it involves increasing the investment in a declining market. Therefore, the best option is to place sell stop orders to limit potential losses.

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