Investment Unit Review

1. 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

2. 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

3. 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

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

• She'll have a human fund manager with advanced technology manage her portfolio.
• 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.

5. 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

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

• ETFs are traded once a day after the market closes.
• An ETF is a single stock that you can buy in the stock market.
• Actively managed ETFs have very low fees.
• ETF prices can change throughout the day as they are exchanged on the market.

7. 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
• Gain of $350
• Loss of $450
• Gain of $800

8. 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

9. 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.

10. 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.
• Need proof that you have saved enough for an emergency fund first.