Test 7 Review: Building Financial Security

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

Which of the following is TRUE of 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 account you have saved, but also on the interest you've already earned

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

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 is a diversified portfolio instead of trying to beat the market

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?

• 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

How is a bond different than 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

An actively managed mutual fund..

• Generally has lower fees than a passively managed index fund

• Is managed by a fund manager who charges a fee

• Always performs better than an index fund

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

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

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

Why is it important for you to understand your risk tolerance before you start investing?

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

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

• 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

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