Which of the following statements is TRUE about compound interest?

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 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 directly impacts how much you will be charged in fees

An actively managed mutual fund…

Is managed by a fund manager who charges a fee

Generally has lower fees than a passively managed index fund

Always performs better than an index fund

Is a mix of two types of stocks and two types of bonds to diversify your portfolio

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

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 the federal government that you pay back with interest

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 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

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

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

Diversifying across asset classes and within each asset class

Investing only when a stock's value is rising

Hiring an investment manager who promises to provide the largest returns

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

Passively managed funds are managed by a fund manager

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

Why is compound interest more advantageous than simple interest?

In compound interest, you earn interest on not only your principal, but also on the interest you’ve already made.

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.

How does investing in the stock market differ from putting money in a savings account at a bank?

Investing allows you to accumulate wealth for retirement while saving is best for short-term purchases or emergencies

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%

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.

Which of the following is TRUE about investing?

It can help you grow your money through the power of compounding

It guarantees a high rate of return over a short period of time

It is meant for achieving short-term financial goals

It involves little risk because your returns are insured up to $250,000

Which of the following explains why risk is not always bad when it comes to investing?

As risk increases, so does the possibility of greater returns

Insurance will cover your investing losses

Robo-advisors eliminate all risk

Gains realized from higher-risk investments are untaxed

Which of the following is a characteristic of dollar-cost averaging?

Dollar-cost averaging involves consistently investing small amounts of money over long periods of time

Dollar-cost averaging is riskier than lump sum investing

Dollar-cost averaging is advantageous because earnings are untaxed

Dollar-cost averaging is offered only through robo-advisors

What are the two ways investors can earn money from a stock?

Dividends and selling the stock at a higher price than they bought it

Dividends and decreasing the stock’s market cap

A fixed interest rate on the investment and selling the stock at a higher price than they bought it

A fixed interest rate on the investment and decreasing the stock’s market cap

What is one difference between actively managed mutual funds and index funds?

Actively managed mutual funds typically have higher fees than index funds do

Actively managed mutual funds invest in less risky investments than index funds

Actively managed mutual funds track the performance of a single stock and bond while an index fund follows an index

Actively managed mutual funds guarantee the average return of the securities in the fund while index funds aim to beat the market

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

Passively managed funds are managed by a fund manager

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

Since stocks have better long-term returns than bonds, why don't all investors just invest all of their money in stocks?

Investors have different tolerances for risk and may make bad decisions with a 100% stock portfolio, such as selling out when stock prices have had a significant drop.

Most investors do have a 100% of their money in stocks since bonds are so unpopular

Bonds typically do best when stocks do best so they make returns even better when they are combined

Bonds are riskier than stocks so you want to own both

How is risk typically compared between stocks and index funds?

Stocks are usually riskier than index funds

Index funds are always riskier than stocks

Both stocks and index funds have the same level of risk

Geraldo reviews his brokerage statement and sees the following two mutual fund investments that he made a year ago. ActiveFund20 had an average return (before fees) of 7% per year and an annual fee of 1%. PassiveFund500 had an average return (before fees) of 6.5% per year and an annual fee of 0.1%. Which investment had a better overall return for Geraldo?

PassiveFund500: It had an overall return of 6.4% while ActiveFund20 had an overall return of 6.0%

ActiveFund20: It had an overall return of 8.0% while PassiveFund500 had an overall return of 6.6%

PassiveFund500: It had an overall return of 6.6% while ActiveFund20 had an overall return of 8%

ActiveFund20: It had an overall return of 7.0% while PassiveFund500 had an overall return of 6.5%

Unit 2 Review (Investing)

12th Grade

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45 Qs

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Unit 2 Review (Investing)

45 questions

Terminology A security in which the investor loans money to a company or government, which then pays regular interest to the investor and returns the principal on the maturity date

Terminology A share of the value of a company, which can be bought, sold, or traded as an investment and which gives the investor small partial ownership of the company

Terminology A market in which prices are falling, encouraging selling.

Terminology A market in which there is increased stock trading and rising stock prices

Terminology The practice of putting a fixed amount into an investment over a period of time, regardless of the price of that investment

Terminology The annual interest payment on a bond, usually expressed as a percentage of its face value

Terminology Money from the profits of a company that is paid out to its shareholders, typically on a quarterly basis

Terminology The rate at which the price of goods increases and consumer purchasing power decreases over time

Terminology Reinvesting earned interest back into the principal to allow money to grow exponentially over time

Terminology The rate at which the price of goods increases and consumer purchasing power decreases over time

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