How does diversification primarily affect a stock portfolio?

It reduces unsystematic risk but not overall market risk

It guarantees a positive return over any five-year period

It reduces unsystematic risk but not overall market risk

It eliminates all investment risk if enough stocks are held

It increases systematic risk while lowering company risk

Which correlation between two assets provides the greatest diversification benefit?

A negative correlation between their returns

A correlation of zero but with identical holdings

A correlation that stays above positive 0.8

A negative correlation between their returns

What is the main purpose of asset allocation?

To divide assets among classes that fit the investor's goals

To eliminate the need to review the portfolio over time and market cycles

To predict which single stock will outperform all others during the next quarter

To divide assets among classes that fit the investor's goals

To guarantee that the portfolio never declines in value over any holding period

FINRA Series 7 (General Securities Representative)/Topics/F3 Investment Strategies

F3 Investment Strategies practice test: free FINRA Series 7 (General Securities Representative) questions

Questions on F3 Investment Strategies fall under Function 3 - Recommends and maintains records, which is 73% of the FINRA Series 7 exam page and Content Outline from FINRA. QuizCram covers 25 practice questions in this domain (8% of the bank), with verified rationales cited to official FINRA specifications. Try the 3 free sample questions below or take the timed simulator to practice the full domain.

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Investment strategies and risk1 of 3
How does diversification primarily affect a stock portfolio?
The answer
Answer: B. Diversification spreads investments across issuers, industries, and asset classes, which reduces company-specific and industry-specific risk. It cannot remove systematic market risk, because a broad market decline affects most securities at once. Diversification is a risk-management tool, not a guarantee of profit, and adding more stocks eventually produces diminishing reductions in unsystematic risk.
Source: FINRA Rule 2111 — Suitability (risk and return)
Investment strategies and risk2 of 3
Which correlation between two assets provides the greatest diversification benefit?
The answer
Answer: D. Correlation measures how closely two assets move together. A negative correlation means one tends to rise when the other falls, which can reduce portfolio volatility more than holding assets that move in the same direction. A correlation of positive one offers no diversification benefit, and identical holdings do not diversify merely because the correlation is zero.
Source: FINRA Rule 2111 — Suitability (portfolio risk)
Investment strategies and risk3 of 3
What is the main purpose of asset allocation?
The answer
Answer: C. Asset allocation divides a portfolio among broad asset classes such as stocks, bonds, and cash. The mix is chosen to balance the investor's return objectives, risk tolerance, time horizon, and liquidity needs. It is not a stock-picking forecast and cannot guarantee against losses. Allocation should be reviewed as the investor's circumstances and market conditions change.
Source: FINRA Rule 2111 — Suitability (asset allocation)

Quick answers on F3 Investment Strategies

How many F3 Investment Strategies questions are on the FINRA Series 7 (General Securities Representative)?

QuizCram covers 25 practice questions in the F3 Investment Strategies domain, mapped directly to the official examination blueprint.

What is the passing score for the FINRA Series 7 (General Securities Representative)?

The benchmark score is 72% (125 scored items (+10 unscored) · 3 h 45 min · 72 scaled to pass (not a percentage) · SIE co-requisite).

Are these F3 Investment Strategies questions written from official sources?

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