U3L4 Finance HW

Even though risk seems like a bad thing, why is that not always the case with investing?

Which of these is not a strategy to manage risk from the videos?

• time

• Invest over time

• stick with savings accounts

• diversification

Explain what it means to diversify by asset class.

Evaluate this statement: Diversification completely eliminates risk.

• True: this is the only way to eliminate risk

• False: there is no point in risking your money

• False: It does not eliminate it, but it does drastically minimize it making investments worthwhile

• True: Using bonds eliminates all risk

1. All of the following are strategies to reduce risk EXCEPT…

1. a) Holding your investments for at least five years

2. b) Making sure your investments are diversified

3. c) Hiring an investment manager who you think can beat the market

4. d) Investing small amounts of money over longer periods of time

• a

• b

• c

• d

2. Leaving your investments in the stock market alone for at least five years is a good way to reduce risk because…

1. a) It allows your investments to earn more interest

2. b) It keeps you from reacting to dips in the market and selling at too low of a price

3. c) Fees are waived for investments held for over five years

4. d) You get a bonus from the company if you invest for five years

• a

• b

• c

• d

3. Which of the following is an example of diversification?

1. a) Putting the majority of your money into a savings account and investing the rest

2. b) Investing different amounts of money every month

3. c) Purchasing shares of stock in a variety of companies and industries

4. d) Using multiple investment managers to get different opinions

• a

• b

• c

• d

Calculate the range of potential annual returns if you invested 10% in bonds and 90% in stocks. How does this compare with the range of potential annual returns if you invested 10% in stocks and 90% in bonds?

• The range is wider for 10% in bonds and 90% in stocks.

• The range is wider for 10% in stocks and 90% in bonds.

• Both ranges are the same.

• Cannot be determined from the given information.

What might you say to someone whose reason for investing in 90% bonds and 10% stocks is that they want a 5.4% return on investment?

• That is a reasonable expectation but not guaranteed.

• It is unlikely to achieve that return with such a conservative portfolio.

• You should invest more in stocks to achieve that return.

• You should invest more in bonds to achieve that return.

Use evidence from this graph to explain the value of investing in both stocks and bonds - not just one or the other.

• Investing in both stocks and bonds reduces risk.

• Investing in only stocks maximizes returns.

• Investing in only bonds ensures safety.

• Investing in both stocks and bonds increases volatility.