Risk vs. Return in Investing

Which statement best captures the general relationship between risk and return in investing?

• Higher risk usually means lower potential returns.

• Higher risk generally comes with higher potential returns.

• Risk and return are unrelated.

• Lower risk always guarantees higher returns.

According to the material, which example illustrates both the potential to earn a lot over time and the possibility of losing money?

• Savings accounts

• Government bonds

• The stock market

• Certificates of deposit (CDs)

Which is NOT one of the three basic rules for dealing with investment risk and return?

• Start early

• Buy and hold

• Diversify

• Trade frequently

A new investor wants to manage risk while aiming for long-term growth. Which combination of actions aligns with the basic rules presented?

• Wait several years before investing; buy and sell often; concentrate on one stock

• Start early; buy and hold; diversify across different investments

• Start late; hold cash only; avoid diversification

• Invest early but day-trade; put all money in one sector

According to Rule 1, why should you start investing early?

• To avoid paying taxes

• To give money time to grow

• To eliminate all investment risk

• To guarantee a fixed income

Which statement best describes compound dividends as presented?

• They are one-time payments from companies

• They come from dividend reinvestment, allowing earnings to generate more earnings

• They only occur with government bonds

• They stop once you reach retirement age

If you save $7 a day for 50 years at a 7% rate of return compounded annually, what is the estimated total you will have?

• $50,000

• $212,788

• $612,788

• $1,000,000

Based on the illustrated savings plan, which factor most contributes to the steep upward curve in later years?

• Flat interest payments that do not change

• Compound growth over time from reinvesting earnings

• Irregular weekly contributions

• A starting amount of $10,000

• About $300,000

• $612,788

• $700,000

• $28,000

According to the scenario, if you start saving later and only have 40 years, approximately how much would you have compared to saving for 50 years?

• About $612,788, the same as 50 years

• About $500,000, a modest reduction

• About $300,000, significantly less

• Less than $50,000