1.10 Step 10 Quiz: Dollar-Cost Averaging Comprehension

What is the main benefit of dollar-cost averaging according to the passage?

• It guarantees high returns in the stock market.

• It removes emotion and fear from investing.

• It requires advanced mathematical knowledge.

• It is only for professional investors.

Answer explanation

The main benefit of dollar-cost averaging is that it removes emotion and fear from investing, allowing investors to make decisions based on strategy rather than panic or excitement.

According to the passage, what is the basic procedure for dollar-cost averaging?

• Invest a different amount of money each month.

• Invest only when the market is high.

• Set up regular savings and invest the same number of dollars every time.

• Wait for the market to drop before investing.

Answer explanation

The basic procedure for dollar-cost averaging involves setting up regular savings and investing the same amount of money consistently, regardless of market conditions, which helps mitigate the impact of volatility.

Why does the passage suggest that dollar-cost averaging is easy to understand?

• It uses a complicated formula.

• It requires college-level mathematics.

• It involves regular savings and a simple process.

• It is only for experts.

Answer explanation

The passage suggests that dollar-cost averaging is easy to understand because it involves regular savings and a simple process, making it accessible to everyone, not just experts or those with advanced math skills.

Suppose you want to start dollar-cost averaging. Which of the following actions would best fit the strategy described in the passage?

• Saving a random amount each month.

• Investing a fixed amount of money at regular intervals.

• Only investing when you feel confident about the market.

• Waiting for expert advice before investing.

Answer explanation

Dollar-cost averaging involves investing a fixed amount of money at regular intervals, which helps mitigate the impact of market volatility. Therefore, the best fit is 'Investing a fixed amount of money at regular intervals.'

What is the main advantage of investing a fixed amount of money regularly in a mutual fund with a fluctuating price?

• You always buy the same number of shares each month.

• You automatically buy more shares when the price is low and fewer when the price is high.

• You avoid all risks associated with investing.

• You can predict the future price of the fund.

Answer explanation

The main advantage of regular investments in a mutual fund is that you automatically buy more shares when prices are low and fewer when prices are high, which helps average out the cost over time.

According to the table, what was the cost per share after four months of investing $100 each month?

• $20.00

• $17.14

• $18.69

• $19.25

Answer explanation

After four months of investing $100 each month, the total investment is $400. If the total shares purchased is 21.4, the cost per share is $400 / 21.4 = $18.69, making $18.69 the correct answer.

Based on the table, what is the average of all four fund prices over the four months?

• $18.69

• $19.25

• $17.14

• $20.00

Why is the cost per share you paid ($18.69) less than the average of all four prices ($19.25) after four months of investing?

• Because you bought more shares when the price was higher.

• Because you invested less money each month.

• Because you bought more shares when the price was lower.

• Because the fund price never changed.

Answer explanation

You paid $18.69 per share because you bought more shares when the price was lower, averaging out to a higher overall price of $19.25 after four months.

Which of the following best describes the process of dollar-cost averaging?

• Investing a different amount each month based on the fund price.

• Investing a fixed amount regularly regardless of the fund price.

• Only investing when the fund price is low.

• Selling shares every month to lock in profits.

Answer explanation

Dollar-cost averaging involves investing a fixed amount regularly, regardless of the fund price. This strategy helps mitigate the impact of market volatility by purchasing more shares when prices are low and fewer when prices are high.

What does dollar-cost averaging guarantee for investors?

• That you will always make a profit

• That the fund you invest in is a good one

• That your cost for shares will be lower than the average of all the prices you pay

• That you will never lose money

Answer explanation

Dollar-cost averaging ensures that your average cost per share is lower than the average price of the shares purchased over time, as it spreads out the investment across different price points.