Investment and Financial Intermediaries Quiz

What is the main advantage of free enterprise?

• Allows people to make a profit

• Promotes economic growth

• Contributes to the nation's wealth

• All of the above

Answer explanation

The main advantage of free enterprise is that it allows people to make a profit, promotes economic growth, and contributes to the nation's wealth. This means that individuals have the opportunity to earn money and create wealth through their own efforts. Free enterprise encourages entrepreneurship and innovation, leading to economic development and prosperity. In this case, the correct choice is 'All of the above' as it encompasses all the advantages mentioned.

What is the definition of investment?

• The act of redirecting resources from being consumed today

• The use of assets to earn income or profit

• Spend money today to earn money in the future

• All of the above

Answer explanation

Investment is the act of redirecting resources from being consumed today, the use of assets to earn income or profit, and spending money today to earn money in the future. This encompasses all of the options provided in the question. An investment involves utilizing resources to generate returns over time, whether through asset utilization or redirecting resources from immediate consumption. Therefore, the correct answer is 'All of the above'.

Which of the following is NOT a financial intermediary?

• Banks

• Mutual funds

• Credit cards

• Life insurance companies

Answer explanation

The question asks which of the options is NOT a financial intermediary. Among the given options, 'Credit cards' is the correct answer as it is not considered a financial intermediary. Financial intermediaries include banks, mutual funds, and life insurance companies. Credit cards, although they facilitate financial transactions, do not act as intermediaries in the same way as the other options.

What is the purpose of diversification in investing?

• To reduce risk

• To increase potential returns

• To provide liquidity

• To share risk

Answer explanation

Diversification in investing is done to reduce risk. By spreading investments across different assets, such as stocks, bonds, and real estate, the overall risk is minimized. This strategy helps to protect against the potential loss of any single investment. Diversification also allows for potential returns to be maximized by taking advantage of different market opportunities. It provides liquidity and helps to share risk among various investments. Overall, diversification is a key strategy to mitigate risk and optimize returns in investing.

What is the role of financial intermediaries in the free enterprise system?

• To provide information

• To share risk

• To provide liquidity

• To promote economic growth

Answer explanation

Financial intermediaries play a crucial role in the free enterprise system by promoting economic growth. They provide information, share risk, and provide liquidity to facilitate economic activities. By connecting borrowers and lenders, they enable efficient allocation of capital and resources. This helps businesses expand, create jobs, and stimulate economic development. Financial intermediaries contribute to the stability and growth of the economy by facilitating investment, encouraging entrepreneurship, and fostering innovation.

Which of the following is a financial asset?

• Credit card

• Computer printouts

• Bond certificates

• Passbooks

Answer explanation

A financial asset refers to an instrument that holds monetary value. Among the given options, bond certificates are considered financial assets. Bond certificates represent a debt obligation issued by a government or corporation. They are tradable and can generate interest income for the holder. Bond certificates are different from credit cards, computer printouts, and passbooks, which do not hold the same financial value. Therefore, bond certificates are the correct choice for a financial asset.

What is the return on an investment?

• The money initially invested

• The sum of money received above the initial investment

• The risk involved in the investment

• The degree of liquidity

Answer explanation

The return on an investment refers to the sum of money received above the initial investment. It is the amount of profit or gain earned from the investment. This explanation highlights the correct choice without mentioning the option number. It is important to note that the explanation should not exceed 75 words and should be in English. Additionally, instead of using the term 'query', it is more appropriate to refer to it as a question.

What is the purpose of a prospectus?

• To provide information to potential investors

• To diversify investments

• To monitor the performance of stocks

• To reduce risk

Answer explanation

The purpose of a prospectus is to provide information to potential investors. It helps them make informed decisions about investing in a particular company or security. The prospectus contains details about the company's financials, business operations, risks, and other relevant information. By reading the prospectus, potential investors can assess the investment opportunity and understand the potential returns and risks involved. It is an essential document for investors to evaluate the suitability of an investment and make informed decisions.

How does investing promote financial growth?

• Allows more money to be used by more people

• Low risk allows more people to invest

• High risk allows more people to gain money

• Mutual funds are increased

Answer explanation

Investing promotes financial growth by allowing more money to be used by more people. It provides opportunities for individuals to grow their wealth and increase their financial resources. By investing, individuals can participate in the growth of businesses and economies, leading to overall economic development. Investing also allows individuals to diversify their portfolios and potentially earn higher returns. It is a way to put money to work and generate income over time. Investing is a key strategy for building long-term financial security and achieving financial goals.

What is the purpose of a financial system?

• To manage portfolios

• To provide financial assets

• To facilitate the transfer of money between savers and borrowers

• To provide liquidity

Answer explanation

The purpose of a financial system is to facilitate the transfer of money between savers and borrowers. It provides a platform for individuals and institutions to exchange funds, enabling the flow of capital in the economy. This system plays a crucial role in connecting those who have excess funds with those who need financial resources. By promoting the movement of money, the financial system supports economic growth and development. It ensures efficient allocation of resources and helps in meeting the financial needs of individuals and businesses.