Canadian Securities Course (CSC) Level 2 Practice Exam

Which risk category is associated with fixed income investments of medium duration?

1. Decreased risk and volatility

2. Average risk and volatility

3. Increased risk and volatility

4. Stable risk and low volatility

The correct answer is: Average risk and volatility

The correct choice recognizes that fixed income investments of medium duration typically experience an average level of risk and volatility. Medium duration fixed income investments tend to have characteristics that balance the fluctuations typically associated with shorter-term and longer-term bonds. They are not as affected by interest rate changes as long-term bonds, which can see significant price movements. Similarly, they offer more yield compared to shorter-duration instruments while not carrying the same level of interest rate risk. Investors can reasonably expect that these investments will provide a steady income stream with moderate price stability, encapsulating the idea of average risk and volatility. This understanding aligns well with how medium-duration fixed income can serve as a cornerstone for many portfolios looking for some degree of safety while still seeking to achieve reasonable returns.