SIE (Training Consultants v3.5, 2025): 8, Customer Accounts, Sec. 7 - Risk Mitigation And Components Of Return

What is Diversification?

A strategy that spreads investments across asset classes or within an asset class to reduce risk.

What is Portfolio Rebalancing?

Adjusting the asset mix in a portfolio over time to align with changing risk tolerance or investment objectives.

What is Hedging?

A risk mitigation technique using strategies such as options or short selling to offset potential losses.

What is Interest in investments?

Payments made by bond issuers to bondholders, usually semi-annually, and legally required.

What are Dividends?

Cash payments made by corporations to shareholders, usually quarterly, but not required.

What are Realized vs. Unrealized Gains/Losses?

Realized gains/losses occur when securities are sold; unrealized gains/losses reflect value changes without selling.

What is Return on Capital?

The overall return an investor earns, including interest, dividends, and profits/losses from selling investments.

What is Cost Basis?

The original purchase price of an investment, adjusted for stock splits and stock dividends, used to calculate tax liability.

What can affect Cost Basis?

Stock splits and stock dividends.

What are Benchmarks and Indices used for?

To measure investment performance by comparing returns to reference points like the S&P 500.

What is Fundamental Analysis?

Analyzing a company’s financials and economic conditions to determine value.

What is the Top-Down Approach in analysis?

Starting with the economy, then the industry, and finally selecting specific stocks.

What is the Bottom-Up Approach in analysis?

Starting with companies, then analyzing their sector, and finally the economy.

Diversification

Spreading investments across different asset classes or within an asset class to reduce exposure to risk.

Portfolio Rebalancing

Adjusting a portfolio’s asset allocation over time to align with changing goals and risk tolerance.

Hedging

Using financial strategies, such as options or short selling, to offset potential investment losses.

Interest

Regular payments made by bond issuers to bondholders, typically semi-annually, and legally required.

Dividends

Cash distributions made by corporations to shareholders, usually quarterly, but not guaranteed.

Realized Gains/Losses

Profits or losses from selling a security at a price different from the purchase price.

Unrealized Gains/Losses

Changes in a security’s value that have not been realized through a sale.

Return on Capital

The total return earned from an investment, including income and gains/losses from sales.

Cost Basis

The amount originally paid for an investment, adjusted for stock splits and dividends, used for tax calculations.

Benchmarks

Reference points used to measure investment performance.

Indices

Groups of securities (e.g., S&P 500) used as benchmarks to track performance.

Fundamental Analysis

Evaluation of a company’s value by reviewing financial statements and economic conditions.

Top-Down Approach

An analysis method beginning with the economy, then industries, then individual companies.

Bottom-Up Approach

An analysis method beginning with individual companies, then sectors, then the economy.#