Savings and Investing Quiz

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 forshort-term purchases or emergencies

Which of the following statements is TRUE about compound interest?

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

• Compound interest means you have a fund manager who is compounding yourreturns 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 directly impacts how much you will be charged in fees

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 high risk asset

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

• Investors expect to earn a higher return when they invest in a high risk asset

• Investors expect to earn zero return when investing in a low risk asset

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 will definitely earn 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 a company

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

• Bonds are usually issued by smaller startup companies while stocks are issued by 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 a passively managed 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 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

Why is it important for you to understand your risk tolerance before you start investing?

• It helps you decide if you want to participate in your employer’s match program for your 401(k)

• It’s recommended that people with a low risk tolerance shouldn’t invest at all

• If you have a high risk tolerance, you may be eligible for lower fees since you won’t care if your portfolio drastically loses value

• You should tailor your investment portfolio so that it assumes an amount of risk you are comfortable with

Katrina works for Penny's Pickles, which offers a 401(k) match for up to 3% of her salary, which is $65,000 per year. In her budget, she only has $150 per month available to save for retirement. What should she do?

• Opt out of the 401(k) plan since she doesn’t have much to contribute; use the money elsewhere in her budget

• Contribute $75/mo to her 401(k) and $75/mo to an IRA, so that she's diversified

• Save the $150/mo in a bank account until she has enough to max out her 401(k), and then invest

• Contribute the full $150/mo to the 401(k) because her company will match that full amount, "doubling" her investment every month

What is one question an investor should ask when deciding whether or not they would like to open a Roth IRA or a Traditional IRA?

• Do I want to make a guaranteed return of 6% or 8%?

• Do I want to pay taxes now or later?

• Do I want to take advantage of my employer’s matching contribution?

• Do I want to take on more or less risk?