Investment Basics 7.1

Justin wants to go to spend a month traveling Europe next summer but doesn’t have the money to do so. He’s thinking of investing the $700 he currently has saved in stock in his favorite restaurant in hopes of earning the money for the vacation. Why shouldn’t he do that?

• Investing in one company’s stock is quite risky.
• Investing your whole savings in the stock market is a bad financial move.
• One year probably isn’t enough time for one stock to turn $700 into a month’s vacation.
• All of the above

Why is compound interest more advantageous than simple interest?

• It’s more difficult to calculate, so fewer people use compound interest, making more profits for those who do.
• Compound interest accumulates very rapidly, so you only have to save for 3 years or fewer to earn far more money.
• Compound interest is attached to the stocks with the highest risk, so you get the highest interest on them
• In compound interest, you earn interest on not only your principal, but also on the interest you’ve already made.

Which of the following statements are true?

• Between cash, stocks, and bonds, bonds are typically considered the riskiest.
• Stocks are the riskiest investments out there.
• Putting money into a savings account with interest is the ideal way for a young adult to invest.
• Historically, stocks have had far greater annual returns than cash, government bonds, and savings

Your risk tolerance for investing should be determined by these two factors:

• Your stocks and bonds
• Your time horizon and when you will need access to the money
• Your debits and credits
• Your education level and ethnicity

Which of the statements below, regarding inflation, is accurate?

• You want the inflation rate to be higher than the interest you’re earning on your investments.
• We already know what the inflation rate will be in the year 2020, and we can use this information to make wise investments.
• Historically, US inflation has been roughly 3%
• If you invest your money, you don’t need to worry about inflation.

You deposit $1,000 into a five year certificate of deposit (a type of savings account with a fixed rate of interest) earning 1% per year that compounds interest annually. After five years, the balance in your account will be…

• About $1000
• More than $1000 but less than $1010
• More than $1010 but less than $1030
• More than $1050

Which of the following investments is considered to be the riskiest?

• Investment in a public stock (e.g., stock in the Wal-Mart company)
• Investment in a Corporate Bond (e.g., a bond issued by Wal-Mart)
• Investment in a U.S. Treasury Bond
• Saving account

Which of the following statements are true about the relationship between risk and return when it comes to investing?

• Investors in bonds can expect to lose money since companies often go bankrupt
• Investing in riskier assets (e.g., start-up companies) will guarantee a higher return for investors
• Since stocks are generally more risky than bonds, investors should expect to receive LOWER returns from stocks
• When it comes to investing, risk and return have a direct relationship, in that the riskier an investment, the higher its expected return.

Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?

• More
• Exactly the same
• Less

What are the differences between investing and saving?

• You are guaranteed to lose money when you invest while putting your money in a savings account is risk-free.
• If you invest in stocks you are guaranteed a 7-9% return while savings accounts have interest rates of about 1%
• The returns you gain from investing in the stock market vary year to year but over the long-term have averaged about 7-9% which is higher than one can expect to earn in a savings account
• If you are fearful about losing money you should always put your money in a savings account and never invest