Multiple choice

A mainstream diversified debt fund is most affected by

  1. re-investment risk

  2. liquidity risk

  3. interest rate risk

  4. default risk
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Debt funds hold bonds and fixed-income securities whose prices move inversely to interest rates. When interest rates rise, bond prices fall, causing the fund's NAV to drop. This interest rate risk is the primary risk for mainstream diversified debt funds. Re-investment risk, liquidity risk, and default risk are secondary concerns for well-diversified funds.

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