Canadian Securities Course (CSC) Level 2 Practice Exam

What type of industries typically offer stable returns on investor equity and includes shares of top companies that are minimally influenced by the economy?

1. Gas, water, and electricity based

2. Cyclical industries

3. Defensive industries

4. Speculative industries

The correct answer is: Defensive industries

Defensive industries are known for providing stable returns on investor equity, primarily because they include sectors that deliver essential services and goods that remain in demand regardless of the state of the economy. These industries typically encompass utilities, healthcare, and consumer staples, where companies tend to exhibit consistent performance and generate steady cash flow. Investors in defensive industries can expect minimal volatility compared to cyclical industries, which are highly correlated with economic cycles and can see significant fluctuations in performance during economic downturns or booms. Speculative industries, on the other hand, tend to involve higher risk and the potential for greater returns, but also greater losses, making them less stable. Thus, defensive industries are preferred by risk-averse investors seeking reliable income and stability. This characteristic of defensive industries attracts investors looking to minimize exposure to economic uncertainties.