SIE (Securities Industry Essentials) Practice Exam

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Which type of risk is inherent in a portfolio consisting of specific company stocks and an exchange-traded fund tracking the S&P 500?

Systematic
Nonsystematic
Liquidity
Market

The correct answer is: Nonsystematic

A portfolio consisting of specific company stocks and an exchange-traded fund tracking the S&P 500 would likely have a mix of systematic and nonsystematic risk. Systematic risk refers to risks that affect the entire market, such as economic or political factors, and cannot be diversified away. Nonsystematic risk, on the other hand, refers to risks that are specific to a particular company or sector, and can be minimized through diversification. Therefore, while some level of systematic risk may still exist in this portfolio, the majority of risk would likely be nonsystematic. Option A is incorrect because systematic risk would only be one component of the portfolio's overall risk, not the sole type of risk. Option C (liquidity) and Option D (market) are also incorrect because they do not accurately represent the type of risk in question. The liquidity of the portfolio's assets and the state of the overall market may contribute to risk, but they do not define the primary type of risk inherent in this particular portfolio.