Unit 3 Investing Formative Review

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

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

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

As a shareholder in a public company, what are the benefits available to you?

• You may receive dividends from the company, if the company pays them, and you have ownership of a portion of the company

• You must receive dividends from the company (all companies must pay them) and you can select members of the management team (e.g., the Chief Executive Officer (CEO))

• You can select members of the management team [e.g., the Chief Executive Officer (CEO)] and vote for members of the Board of Directors

• You have ownership of a portion of the company and receive coupon payments from the issuer

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

Which market cap is less risky?

• Large cap

• Mid cap

• Small cap

• Extra large cap

A beta of less than one...

• A beta of less than one...

• correlates with the market

• is less volatile

• has no volatility

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

Which of the following is an example of diversification?

• Stock

• Treasury Bond

• Mutual Fund

• Savings Account