Investing Test Review

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Which of the following is TRUE, based on the historic returns of the S&P 500?

• The stock market fluctuates in the short term and is difficult to predict. It has an average annual return of 6-7%, adjusted for inflation.
• Stock prices rise consistently in the short term and only decrease during recessions. The stock market has an average annual return of 15%, adjusted for inflation.
• The stock market fluctuates in the short term and the majority of investors can predict the direction of the market. The stock market has an average annual return that is negative, adjusted for inflation.
• On average, the growth of the stock market matches the rate of inflation. It has an average annual return of 2-3%, adjusted for inflation..

Sanjana is explaining what Social Security is to her younger brother. Which of the following descriptions should she use?

• Social Security is a type of retirement savings plan that you can open through a brokerage firm
• Social Security is a government program that pools contributions from current workers to then provide retirement support benefits to those who are eligible
• Social Security is a type of retirement savings plan offered by some employers
• Social security is a government mandate that requires employers to offer their employees a 401(k) or pension plan

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

All of the following are advantages of saving for retirement in a 401(k), EXCEPT...

• A 401(k) has a higher contribution limit than an IRA
• You can withdraw money at any time without paying a penalty
• Some employers will match contributions to your 401(k)
• Your 401(k) contributions are tax-deductible

What is a bond?

• A type of loan you can get from the federal government that you pay back with interest
• 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 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 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
• 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

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

• Investing only when a stock's value is rising
• Investing in only one company
• Hiring an investment manager who promises to provide the largest returns
• Diversifying across asset classes and within each asset class