WorksheetsUnit 3 Investing Review
Total questions: 26
Worksheet time: 13mins
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
Which of the following statements is TRUE about compound interest?
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 allows you to earn interest not only on the amount you have saved, but also on the interest you've already earned
Compound interest directly impacts how much you will be charged in fees
What kinds of behaviors can PREVENT people from making smart investing decisions?
Staying calm when the market is experiencing a downturn
Buying stocks when prices are low and selling them when they're high
Exiting the market because that's what everyone else is doing
Investing in a diversified portfolio instead of trying to beat the market
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
Which of the following accurately describes a difference between an individual bond compared to a bond fund?
A bond pays you dividends while a bond fund pays you regular interest
A bond guarantees you a higher rate of return than a bond fund
A bond is issued by a company while bond funds only invest in government bonds
A bond is considered to be a less diversified investment than a bond fund
Which of the following statements about Exchange Traded Funds (ETFs) is TRUE?
ETFs are traded once a day after the market closes
An ETF is a single stock that you can buy in the stock market
Actively managed ETFs have very low fees
ETF prices can change throughout the day as they are exchanged on the market
You bought 10 shares of stock in StreamingVideoCo for $45 per share. Two months later you sold the 10 shares of stock for $80 per share. What was your profit or loss on StreamingVideoCo stock? (Assume that StreamingVideoCo didn't pay a dividend and that you didn't incur any trading fees during that period.)
Loss of $800
Profit of $350
Loss of $450
Profit of $800
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 high risk asset
Investors expect to earn a higher return when they invest in a low risk asset
Investors expect to earn a higher return when they invest in a high risk asset
Investors expect to earn zero return when investing in a low risk asset
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 will definitely earn a high return
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 a company
Bonds are typically riskier than stocks but have the potential to earn higher returns
Bonds are usually issued by smaller startup companies while stocks are issued by 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 capital gains tax?
Capital gains tax is only applied to the sale of personal items, such as cars and jewelry
Capital gains tax is applied at a uniform rate across all types of investments, regardless of the holding period
Capital gains tax is charged on the profit made from the sale of an investment or real estate
Capital gains tax is something you can opt-out of if you do not want to pay it for a specific year
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 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
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 on your investments
It’s a type of account used to buy and sell stocks, bonds, and funds
It’s a special type of 401(k) plan that only some employers offer
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
Katrina works for Penny's Pickles, which offers a 401(k) match for up to 3% of her salary, which is $65,000 per year. In her budget, she only has $150 per month available to save for retirement. What should she do?
Opt out of the 401(k) plan since she doesn’t have much to contribute; use the money elsewhere in her budget
Contribute $75/mo to her 401(k) and $75/mo to an IRA, so that she's diversified
Save the $150/mo in a bank account until she has enough to max out her 401(k), and then invest
Contribute the full $150/mo to the 401(k) because her company will match that full amount, "doubling" her investment every month
A disadvantage of using a robo-adviser might be that...
You are charged higher fees than if a human fund manager adjusted your portfolio
You may not be able to get advice from a human financial advisor when you want it
You don’t have any input as to how your portfolio is invested
You’ll be put on a waitlist to use the robo-adviser since there are only a handful of them to choose from
What is one question an investor should ask when deciding whether or not they would like to open a Roth IRA or a Traditional IRA?
Do I want to make a guaranteed return of 6% or 8%?
Do I want to pay taxes now or later?
Do I want to take advantage of my employer’s matching contribution?
Do I want to take on more or less risk?
Nancy is new to investing and is eager to get started. All of the following are things she should do EXCEPT...
Invest in a low cost index fund
Estimate how much she will need for retirement to determine how much she needs to invest each month
Pick individual stocks to see if she can beat the market
Invest in a diversified portfolio
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 fund 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
Which of the following is an example of insider trading?
Purchasing stocks based on the general trend in the stock market
Buying or selling stocks based on information that is not available to the public
Investing in a diversified portfolio to spread out the risk of investment
Selling stocks because of publicly released financial news and company earnings
Why are Index Funds such a popular investing option?
They are a mix of 2-3 individual stocks that can help you diversify your portfolio
They provide a low-cost, diversified investment option that closely matches the overall return of a given index, such as the S&P 500
They are actively managed by a fund manager
They are managed by robo-advisors that guarantee higher returns than the overall stock market
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 7.0% 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 return for Geraldo (net of fees)?
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 6%
ActiveFund20: It had an overall return of 7.0% while PassiveFund500 had an overall return of 6.5%
PassiveFund500: It had an overall return of 6.4% while ActiveFund20 had an overall return of 6.0%
Identify two factors that can influence an individual company’s stock price.
Company earnings and market trends
Weather conditions and company logo
Employee satisfaction and office location
CEO's favorite color and company mascot
Josie is trying to figure out how to implement her investing strategy. She wants to compare online brokers, financial advisors and robo-advisors. Which of the following is a question she should consider during her research?
What are the fees associated with each option?
How much human interaction is available with each service?
What is the historical performance of each option?
Are there any educational resources provided?
Why is it important to start saving for retirement when you’re young, even though retirement is likely decades away?
To take advantage of compound interest over a longer period
Because it is mandatory by law
To avoid paying higher taxes
To ensure immediate financial freedom
Which of the following is a key difference between index funds and mutual funds?
Index funds are passively managed, while mutual funds are actively managed.
Index funds have higher fees compared to mutual funds.
Mutual funds track a specific market index, while index funds do not.
Index funds offer more flexibility in investment choices than mutual funds.
