General Securities Representative (Series 7) Practice Exam

What percentage of a customer's investment portfolio is recommended to be committed to options trading?

1. No more than 5-10%

2. No more than 15-20%

3. No more than 20-25%

4. All available funds

The correct answer is: No more than 15-20%

The recommendation to commit no more than 15-20% of a customer's investment portfolio to options trading is rooted in the consideration of risk management and diversification principles. Options trading inherently involves higher volatility and risk compared to traditional stock trading. By limiting the allocation to this percentage, investors are encouraged to maintain a balanced portfolio that allows for growth potential while reducing exposure to the heightened risks that options can bring. Investing in options can lead to significant gains; however, it can also result in substantial losses. Therefore, the guideline of 15-20% serves as a prudent strategy, ensuring that the majority of an investor's capital remains in less risky, more stable investments. This allocation allows for the potential benefits of options trading without overwhelming the investor's overall portfolio with excessive risk. The other percentages provided would either suggest a more aggressive stance which could expose the investor to undesirable levels of risk, or to allocate all available funds, which contradicts the principle of diversification and prudent investment strategies. This recommendation helps promote sound investment practices while still allowing investors to engage with the options market.