General Securities Representative (Series 7) Practice Exam

What do investors look for when they aim to limit downside exposure in their portfolios?

1. Low volatility stocks

2. Index options

3. High dividend stocks

4. Defensive sector funds

The correct answer is: Index options

Investors looking to limit downside exposure in their portfolios often consider using index options. Index options provide a way for investors to hedge against potential market declines. By purchasing put options on a stock index, an investor can protect their portfolio against losses if the market falls, as these options increase in value when the index decreases. This strategy allows investors to manage risk effectively without having to sell off assets prematurely. Managing downside risk is crucial in portfolio management, particularly during times of market uncertainty. While low volatility stocks, high dividend stocks, and defensive sector funds can all contribute to a more conservative investment strategy, index options specifically offer a form of insurance against broad market movements, making them a powerful tool for limiting downside exposure.