Investing Review Flashcards
How does investing in the stock market differ from putting money in a savings account at a bank?
A
Investing is always a less risky option than saving
B
Investing is best for short-term situations like emergency funds; saving is best for the long-term
C
Investing typically earns between 1-2% while saving generally earns between 5-7%
D
Investing allows you to accumulate wealth for retirement while saving is best for short-term purchases or emergencies
D
Investing allows you to accumulate wealth for retirement while saving is best for short-term purchases or emergencies
What kinds of behaviors can PREVENT people from making smart investing decisions?
A
Staying calm when the market is experiencing a downturn
B
Buying stocks when prices are low and selling them when they’re high
C
Exiting the market because that’s what everyone else is doing
D
Investing in a diversified portfolio instead of trying to beat the market
C
Exiting the market because that’s what everyone else is doing
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?
A
His purchasing power will DECREASE because the interest rate is lower than the historical rate of inflation
B
His purchasing power will INCREASE because the interest rate is higher than the historical rate of inflation
C
His purchasing power will INCREASE because the interest will compound faster than the historical rate of inflation
D
His purchasing power will remain the SAME because the interest rate is the same as the historical rate of inflation
A
His purchasing power will DECREASE because the interest rate is lower than the historical rate of inflation
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.)
A
Loss of $800
B
Profit of $350
C
Loss of $450
D
Profit of $800
B
Profit of $350
Which of the statements below BEST describes the relationship between risk and return when considering an investment?
A
Investors expect to earn a lower return when they invest in a high-risk asset
B
Investors expect to earn a higher return when they invest in a low-risk asset
C
Investors expect to earn a higher return when they invest in a high-risk asset
D
Investors expect to earn zero return when investing in a low-risk asset
C
Investors expect to earn a higher return when they invest in a high-risk asset
Why is diversification a recommended investment strategy?
A
Investing in a diversified portfolio guarantees that you won’t lose money with your investments
B
If you tell your fund manager to use diversification, they’ll charge you lower fees
C
Diversifying your portfolio helps reduce risk
D
If you diversify your portfolio, you will definitely earn a high return
C
Diversifying your portfolio helps reduce risk
Which of the following is a characteristic of dollar-cost averaging?
A
Dollar-cost averaging is a way to decrease your risk
B
Dollar-cost averaging is a strategy that only expert investors use
C
Dollar-cost averaging is advantageous because earnings are untaxed
D
Dollar-cost averaging is offered exclusively through robo-advisors
A
Dollar-cost averaging is a way to decrease your risk
How can someone make money from investing in a stock?
A
They sell the stock for a lower price than what they bought it for
B
They receive dividends or they sell the stock at a higher price than what they bought it for
C
The stock loses value but the overall market experiences a positive return
D
They sell the stock for the same price they bought it for
B
They receive dividends or they sell the stock at a higher price than what they bought it for
Why is it important for you to understand your risk tolerance before you start investing?
A
It helps you decide if you want to participate in your employer’s match program for your 401(k)
B
It’s recommended that people with a low-risk tolerance shouldn’t invest at all
C
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
D
You should tailor your investment portfolio so that it assumes an amount of risk you are comfortable with
D
You should tailor your investment portfolio so that it assumes an amount of risk you are comfortable with
Nancy is new to investing and is eager to get started. All of the following are things she should do EXCEPT…
A
Invest in a low cost index fund
B
Estimate how much she will need for retirement to determine how much she needs to invest each month
C
Pick individual stocks to see if she can beat the market
D
Invest in a diversified portfolio
C
Pick individual stocks to see if she can beat the market
Which of the following is TRUE, based on the historic returns of the S&P 500?
A
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.
B
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.
C
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.
D
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.
A
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.
How are active investing and passive investing different?
A
Active investing requires a hands-off approach while passive investing requires a hands-on approach
B
Active investing typically has lower fees while passive investing typically has higher fees
C
Active investing requires you to make a minimum number of trades per day while passive investing does not
D
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
D
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…
A
Investing only when a stock’s value is rising
B
Investing in only one company
C
Diversifying across asset classes and within each asset class
D
Hiring an investment manager who promises to provide the largest returns
C
Diversifying across asset classes and within each asset class
Tracie is new to investing and is going to use an app that offers trades with zero fees. After opening her account, Tracie should first…
A
Invest a large sum of money
B
Conduct research on the investments she’s interested in
C
Limit herself to one small investment so she can’t lose as much
D
Hire an investment manager
B
Conduct research on the investments she’s interested in
All of the following are risks of investing in a single stock, EXCEPT…
A
If the company’s profits decline, the stock price could decrease
B
If the overall stock market declines, the stock price could decrease
C
If the company does not issue new stock, current stockholders could lose their entire investment
D
If the company goes out of business, stockholders could lose their entire investment
C
If the company does not issue new stock, current stockholders could lose their entire investment
