Investing Unit Review

How does investing in the stock market differ from putting money in a savings account at a bank?

• Investing is always a less risky option than saving

• Investing is best for short-term situations like emergency funds; saving is best for the long-term

• Investing typically earns between 1-2% while saving generally earns between 5-7%

• Investing allows you to accumulate wealth for retirement while saving is best for short-term purchases or emergencies

Why is compound interest more advantageous than simple interest?

• Compound interest is harder to calculate, so those who use it earn higher profits for their efforts

• Compound interest means you have a fund manager who is compounding your returns without charging a fee

• Compound interest allows you to earn interest not only on the amount you have saved, but also on the interest you've already earned

• Compound interest has lower fees than simple interest

What kinds of cognitive biases and behaviors can prevent people from making smart investing decisions?

• Staying calm when the market is experiencing a downturn.

• Buying stocks when prices are low and selling them when they’re high

• Exiting the market because that’s what everyone else is doing

• Investing in a diversified portfolio instead of trying to time the market

When investing in individual stocks, you should expect that…

• Stock prices for a company are relatively easy to predict

• Unforeseen company events can have a dramatic impact on the stock price for a company

• You will have an informational edge by reading an article about a company you want to invest in

• Stock prices for an individual stock will be more stable over the long-term than prices for a diversified index fund

You bought 10 shares of stock in PBHSBusinessCo for $30 per share. Two months later you sold the 10 shares of stock for $65 per share. What was your profit or loss on PBHSBusinessCo stock? Assume that PBHSBusinessCo didn't pay a dividend and that you didn't incur any trading fees during that period.

• Loss of $800

• Gain of $350

• Loss of $450

• Gain of $800

Which of the statements below BEST describes the relationship between risk and return when considering an investment?

• Investors expect to earn a lower return when they invest in a risky asset

• Investors expect to earn a higher return when they invest in a low risk asset, like a bond

• Investors expect to earn a higher return when they invest in a high risk asset like stock in a small company

• Investors do not expect to earn a return on a high risk investment but rather expect to lose their money

Why is diversification a recommended investment strategy?

• Investing in a diversified portfolio guarantees that you won’t lose money with your investments.

• If you tell your fund manager to use diversification, they’ll charge you lower fees.

• Diversifying your portfolio helps reduce risk.

• If you diversify your portfolio, you are guaranteed to make a high return.

How is a bond different from a stock?

• A bond is a loan you give to an organization while a stock is partial ownership in the company.

• Bonds are typically riskier than stocks but have the potential to earn higher returns.

• A bond is usually issued by smaller, startup companies while stocks are with well established organizations.

• Bonds are best for earning high returns while stocks are best for providing a stable source of income.

An actively managed mutual fund…

• Generally has lower fees than an index fund

• Is managed by a fund manager who charges a fee

• Always performs better than an index fund

• Is a mix of two types of stocks and two types of bonds to diversify your portfolio

How can someone make money from investing in a stock?

• They sell the stock for a lower price than what they bought it for.

• They receive dividends from the company they bought the stock of and/or they sell the stock at a higher price than what they bought it for.

• The stock loses value but the overall market experiences a positive return.

• They sell the stock for the same price they bought it for.