Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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What is a primary function of the secondary market?

Facilitating new investment opportunities
Allowing investors to divest existing holdings
Issuing new securities to the public
Conducting private transactions

The correct answer is: Allowing investors to divest existing holdings

The primary function of the secondary market is to allow investors to divest existing holdings. In the secondary market, previously issued securities are bought and sold among investors rather than being issued for the first time. This creates liquidity for those who wish to sell their securities, providing a platform where they can do so at market-determined prices. Investors can convert their investments back into cash or reallocate their capital to new opportunities. While the secondary market doesn't issue new securities, that activity is typically the role of the primary market. Private transactions may occur outside of this context but are not the fundamental purpose of the secondary market. The secondary market’s ability to facilitate trades of existing securities enhances overall market efficiency and investor confidence, enabling a dynamic trading environment where investment can continually adjust to new information and changes in sentiment.