Investing - Unit Test

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

Nancy is new to investing and is eager to get started. All of the following are things she should do EXCEPT...

• Invest in a low cost index fund
• Estimate how much she will need for retirement to determine how much she needs to invest each month
• Pick individual stocks to see if she can beat the market
• Invest in a diversified portfolio

3. 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

4. Which of the following statements about Exchange Traded Funds (ETFs) is TRUE?

• ETFs are traded once a day after the market closes
• An ETF is a single stock that you can buy in the stock market
• Actively managed ETFs have very low fees
• ETF prices can change throughout the day as they are exchanged on the market

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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