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

• 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%

Daniel has saved $2,000 in a savings account that earns 0.5% interest annually. What will most likely happen to the purchasing power of his savings over time? 

• His purchasing power will INCREASE because the interest rate is higher than the historical rate of inflation

• His purchasing power will INCREASE because the interest will compound faster than the historical rate of inflation

• His purchasing power will DECREASE because the interest rate is lower than the historical rate of inflation

• His purchasing power will remain the SAME because the interest rate is the same as the historical rate of inflation

You bought 10 shares of stock in StreamingVideoCo for $45 per share. Two months later you sold the 10 shares of stock for $80 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 $800

• Profit of $350

• Loss of $450

• Profit of $800

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

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

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

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

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

• If you diversify your portfolio, you will definitely earn a high return

• Diversifying your portfolio helps reduce risk

How is a bond different from a stock?

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

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

• 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

How can someone make money from investing in a stock?

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

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

• They receive dividends or they sell the stock at a higher price than what they bought it for

• 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?

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

• 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

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

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

Sally 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

Gina is new to investing and is eager to get started. All of the following are things she should do EXCEPT...

• Invest in a low cost index fund

• Estimate how much she will need for retirement to determine how much she needs to invest each month

• Pick individual stocks to see if she can beat the market

• Invest in a diversified portfolio