Financial Literacy and Economic Principles

Question 1

What are the two primary types of investments in financial markets?

Answer 1

Stocks and bonds.

Question 2

Fill in the blank: Diversification involves spreading investments across different _____ to reduce risk.

Answer 2

asset classes

Question 3

True or False: Higher potential returns generally come with higher risks.

Answer 3

True

Question 4

What is compounding in investing?

Answer 4

Earning returns on both the initial investment and accumulated returns over time.

Question 5

What is the 50/30/20 budgeting rule?

Answer 5

50% for needs, 30% for wants, and 20% for savings and debt repayment.

Question 6

Fill in the blank: An emergency fund should ideally cover _____ months of living expenses.

Answer 6

3–6

Question 7

True or False: The debt avalanche method focuses on paying off smallest debts first.

Answer 7

False (It focuses on paying off debts with the highest interest rates first).

Question 8

What is loss aversion in behavioral economics?

Answer 8

The tendency to fear losses more than valuing equivalent gains.

Question 9

What is anchoring in behavioral economics?

Answer 9

Overreliance on the first piece of information encountered when making decisions.

Question 10

Provide an example of herd behavior in financial markets.

Answer 10

Investors buying stocks during a bubble because others are doing so.

Question 11

True or False: Nudge theory aims to influence better financial decisions through design.

Answer 11

True

Question 12

What is the difference between a stock and a bond?

Answer 12

A stock represents ownership in a company, while a bond is a loan to an entity with periodic interest payments.

Question 13

Fill in the blank: An IPO stands for _____ and represents a company’s first public sale of stock.

Answer 13

Initial Public Offering

Question 14

What is the purpose of an index like the S&P 500?

Answer 14

To track the performance of a specific segment of the stock market.

Question 15

True or False: Mutual funds and ETFs allow for investment in diversified portfolios.

Answer 15

True

Question 16

What is mental accounting in behavioral economics?

Answer 16

Categorizing money into separate ‘accounts’ based on its source or purpose.

Question 17

How does the forex market differ from the stock market?

Answer 17

The forex market trades currencies, while the stock market trades ownership shares in companies.

Question 18

What are two common participants in financial markets?

Answer 18

Retail investors and institutional investors.

Question 19

Provide an example of using the zero-based budgeting method.

Answer 19

Allocating every dollar of income to expenses, savings, or debt repayment until nothing is unassigned.

Question 20

What is the role of market makers in financial markets?

Answer 20

To facilitate liquidity by buying and selling securities.