Investing and Insurance Test Review

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

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

  emergencies

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

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

• Investing is always a less risky option than saving

Which of the following statements is TRUE about compound interest?

• Compound interest directly impacts how much you will be charged in fees

• 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 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 your returns without charging a fee

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?

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

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

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

• Diversifying your portfolio helps reduce risk

How is a bond different from a stock?

• Bonds are usually issued by smaller startup companies while stocks are issued by well established organizations

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

An actively managed mutual fund…

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

• Is managed by a fund manager who charges a fee

• Generally has lower fees than a passively managed index fund

• Always performs better than an index fund

How can someone make money from investing in a stock?

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

• 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 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?

• 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)

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

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 pay taxes now or later?

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

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

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

Sanjana is explaining what Social Security is to her younger brother. Which of the following descriptions should she use?

• Social security is a government mandate that requires employers to offer their employees a 401(k) or pension plan

• Social Security is a government program that pools contributions from current workers to fund retirement support benefits to those who are eligible

• Social Security is a type of retirement savings plan that you can open through a brokerage firm

• Social Security is a type of retirement savings plan offered by some employers