Chapter 7 Review Game: Investing

All of the following are reasons to invest, EXCEPT…

• To minimize the impact on inflation, which causes you to lose purchasing power

• To earn a consistent rate of return with lower risk than typical savings accounts

• To build wealth by reinvesting your returns and allowing them to compound

• To earn higher average rates of return than you would in a typical savings account

An investor can best harness the power of compounding by doing all of the following, EXCEPT

• Making frequent trades

• Starting to invest early

• Reinvesting earnings

• Minimizing risk

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.

All of the following are risks of owning an individual stock, EXCEPT...

• The stock price could decrease and you could lose money

• Unforeseen developments could cause the company to go out of business

• Stock prices are hard to predict in the short-term

• Demand could unexpectedly increase for your company’s stock

Justin wants 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.

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

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

Which of the following correctly orders investment options from lowest to highest risk?

• An index fund tracking the S&P 500, an ETF tracking the technology sector, a government bond, an individual stock

• A government bond, an index fund tracking the S&P 500, an ETF tracking the technology sector, an individual stock

• A government bond, An ETF tracking the technology sector, an individual stock, an index fund tracking the S&P 500

• An index fund tracking the S&P 500, a government bond, an individual stock, an ETF tracking the technology sector

Which of the following statements about dividends is TRUE?

• Dividends are earned when you sell your shares for a higher price than when you bought them

• Dividends are typically set between $20 and $30 per share

• Dividends cannot legally be reinvested in the same company where they were earned

• Dividends are usually paid quarterly by well established publicly traded companies

Wanda bought a share in Tasty Ice Cream for $25 on March 1. On June 13, Tasty Ice Cream’s shares were trading for $23.50. What happens if she sells her share on June 13?

• Wanda will make $1.50 by selling her share.

• Wanda will receive her full $25 purchase price back, but she won’t make any profit.

• Wanda cannot sell her share on June 13; she must wait for the price to go above $25 in order to sell.

• Wanda will receive $23.50 for her share, meaning she lost $1.50 on the investment

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