Unit Test Review (Investing)

Which of the following is TRUE, based on the historic returns of the S&P 500?

• The stock market fluctuates in the short term and is difficult to predict. It has an average annual return of 6-7%, adjusted for inflation.
• Stock prices rise consistently in the short term and only decrease during recessions. The stock market has an average annual return of 15%, adjusted for inflation.
• The stock market fluctuates in the short term and the majority of investors can predict the direction of the market. The stock market has an average annual return that is negative, adjusted for inflation.
• On average, the growth of the stock market matches the rate of inflation. It has an average annual return of 2-3%, adjusted for inflation..

Daniel has saved $2,000 in a savings account that earns 0.5% interest annually. What will most likely happen to the purchasing power of his savings over time?

• His purchasing power will DECREASE because the interest rate is lower than the historical rate of inflation
• His purchasing power will INCREASE because the interest rate is higher than the historical rate of inflation
• His purchasing power will INCREASE because the interest will compound faster than the historical rate of inflation
• His purchasing power will remain the SAME because the interest rate is the same as the historical rate of inflation

What is a bond?

• A type of loan you can get from the federal government that you pay back with interest
• An investment in which you loan money to a corporation or government and are paid back with interest and the principal that you originally lent to them.
• A type of loan you can get from a bank that you pay back with interest
• An investment in which you loan money to another individual and are paid back with interest

How are active investing and passive investing different?

• Active investing requires a hands-off approach while passive investing requires a hands-on approach
• Active investing typically has lower fees while passive investing typically has higher fees
• Active investing requires you to make a minimum number of trades per day while passive investing does not
• Active investing is typically done by a fund manager trying to beat the market while passive investing typically involves investing in a popular index like the S&P 500

A commonly used strategy to minimize investing risk is...

• Investing only when a stock's value is rising
• Investing in only one company
• Hiring an investment manager who promises to provide the largest returns
• Diversifying across asset classes and within each asset class

All of the following are true about a passively managed fund EXCEPT…

• Fees for a passively managed fund are typically lower than those for an actively managed fund
• Passively managed funds are generally seen as low risk investments
• A passively managed fund guarantees the average return of the securities it includes
• Passively managed funds are managed by a fund manager

Why is compound interest more advantageous than simple interest?

• It’s more difficult to calculate, so fewer people use compound interest, making more profits for those who do.
• Compound interest accumulates very rapidly, so you only have to save for 3 years or fewer to earn far more money.
• Compound interest is attached to the stocks with the highest risk, so you get the highest interest on them.
• In compound interest, you earn interest on not only your principal, but also on the interest you’ve already made.

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

You bought 10 shares of stock in StreamingVideoCo for $15 per share. Two months later you sold the 10 shares of stock for $32 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
• Gain of $170
• Loss of $450
• Gain of $800

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 the company.
• Bonds are typically riskier than stocks but have the potential to earn higher returns.
• A bond is usually issued by smaller, startup companies while stocks are with well established organizations.
• Bonds are best for earning high returns while stocks are best for providing a stable source of income.