Chapter 3 Investing

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. 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 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 directly impacts how much you will be charged in fees

3. What kinds of 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 beat the market

4. Which of the following accurately describes a difference between an individual bond compared to a bond fund?

• A bond pays you dividends while a bond fund pays you regular interest
• A bond guarantees you a higher rate of return than a bond fund
• A bond is issued by a company while bond funds only invest in government bonds
• A bond is considered to be a less diversified investment than a bond fund

5. 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

6. 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

7. 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

8. 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

9. 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

10. What is a brokerage account used for?

• It’s an online portal that allows you to set up appointments with a fund manager
• It’s the account you use to pay any taxes you owe on money you earned on your investments
• It’s a type of account used to buy and sell stocks, bonds, and funds
• It’s a special type of 401(k) plan that only some employers offer