Canadian Securities Course (CSC) Level 2 Practice Exam

What do dividend funds typically invest in, and how do they compare in risk to fixed income investments?

1. High-quality common shares, lower risk than fixed income

2. Preferred shares, higher risk than fixed income

3. Common shares with no dividends, riskier than fixed income

4. Physical commodities or derivatives, similar risk to fixed income

The correct answer is: Preferred shares, higher risk than fixed income

Dividend funds typically invest in preferred shares. Preferred shares are a type of equity security that pays a fixed dividend and has a senior claim to the company's assets compared to common shares. Preferred shares are considered higher risk than fixed income investments because they have characteristics of both debt (fixed dividend payment) and equity (subordinated to bonds in the event of liquidation). Fixed income investments, on the other hand, provide a more predictable income stream and are generally considered lower risk compared to preferred shares.