Investing Unit Test 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 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 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

Your friend Jenny wants to use a robo-adviser to manage her portfolio. What does this mean?

• A computer software system is going to adjust her portfolio based on her preferences.

• Jenny will sit down for quarterly investment meetings with a robot.

• Jenny can receive investing advice through an online chat service provided through the brokerage firm.

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

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

Which of the following statements about Exchange Traded Funds (ETFs) is TRUE?

• ETFs are traded once a day after the market closes.

• Actively managed ETFs have very low fees.

• ETF prices can change throughout the day as they are exchanged on the market.

You bought 25 shares of stock in ABC Co for $55 per share. Two months later you sold the 25 shares of stock for $100 per share. What was your profit or loss on StreamingVideoCo stock? Assume that StreamingVideoCo didn't pay a dividend and that you didn't incur any trading fees during that period.

• Loss of $1375

• Gain of $1125

• Loss of $1125

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

Why is diversification a recommended investment strategy?

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

• Diversifying your portfolio helps reduce risk.

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

To open a brokerage account, you...

• Need to be over the age of 21 or you need a parent to open it for you.

• Have to set an appointment with a brokerage firm as you can only open it in person.

• Must be able to transfer money from a checking or savings account.