Savings and Investing Test

Name, Period, Date

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

2. Why is compound interest more advantageous than simple interest?

• Compound interest is harder 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 has lower fees than simple interest

3. When investing in individual stocks, you should expect that…

• Stock prices for a company are relatively easy to predict
• Unforeseen company events can have a dramatic impact on the stock price for a company
• You will have an informational edge by reading an article about a company you want to invest in
• Stock prices for an individual stock will be more stable over the long-term than prices for a diversified index fund

4. 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 risky asset
• Investors expect to earn a higher return when they invest in a low risk asset, like a bond
• Investors expect to earn a higher return when they invest in a high risk asset like stock in a small company
• Investors do not expect to earn a return on a high risk investment but rather expect to lose their money

5.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 are guaranteed to make a high return.

6. 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.

7. 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 from the company they bought the stock of and/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.

8. 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 in your investments.
• It’s a type of account used to buy and sell stocks, bonds, and mutual funds.
• It’s a special type of 401(k) plan that only some employers offer.

9. 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.