Unit 3: Investment Quiz Study Guide

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 following statements is TRUE about 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 amount 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 in a diversified portfolio instead of trying to beat the market

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

You bought 10 shares of stock in StreamingVideoCo for $45 per share. Two months later you sold the 10 shares of stock for $80 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

• Profit of $350

• Loss of $450

• Profit of $800

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

• If you tell your fund manager to use diversification, they’ll charge you lower fees

• If you diversify your portfolio, you will definitely earn a high return

1. How is a bond different from a stock? 

• 1. 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

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

• 1. They sell the stock for the same price they bought it for

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