Selecting Investments: Understanding Risk & Risk Tolerance

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 these.

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.

Between cash, stocks, and bonds, bonds are typically considered the riskiest.

• Yes

• No

Putting money into a savings account with interest is the ideal way for a young adult to invest.

• Yes

• No

Between cash, stocks, and bonds, cash is typically considered the least risky.

• Yes

• No

There are investment options even riskier than stocks.

• Yes

• No

Historically, stocks have had far greater annual returns than cash, government bonds, and savings accounts.

• Yes

• No

An investor should expect a higher return when investing in stocks compared to the return from a FDIC-insured savings account

• Yes

• No

Since stocks are generally more risky than bonds, investors should expect to receive LOWER returns from stocks

• Yes

• No

Investing in riskier assets (e.g., start-up companies) will guarantee a higher return for investors

• Yes

• No