Investment

Question 1

Katrina works for Penny’s Pickels, which offers a 401(k) match 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?

Answer 1

1. Opt out of the 401(k) plan since she doesn’t have much to contribute, use the money elsewhere in her budget
2. Contribute the full $150/mo to the 401(k) bc her company will match that full amount, “doubling” her investment every month
3. Contribute $75/mo to her 401(k) and $75/mo to an IRA, so that she’s diversified
4. Save the $150/mo in a bank account until she has enough to max out her 401(k), and then invest

Question 2

Why is it important to you to understand your risk tolerance before you star investing?

Answer 2

1. 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
2. It’s recommended that people with a low risk tolerance shouldn’t invest at all
3. It helps you decide if you want to participate in your employer’s match program for your 401(k)
4. You should tailor your investment portfolio so that it assumes an amount of risk you are comfortable with

Question 3

Which of the following is a characteristic of dollar-cost averaging?

Answer 3

1. Dollar-cost averaging is a way to decrease your risk
2. Dollar-cost averaging is offered exclusively through robo-advisors
3. Dollar-cost averaging is advantageous bc earning are untaxed
4. Dollar-cost averaging is a strategy that only expert investors use

Question 4

Daniel has saved $2,000 in a saving account that earns 0.5% interest annually. What will most likely happen to the purchasing power of his savings over time?

Answer 4

1. His purchasing power will INCREASE bc the interest rate is higher than the historical rate of inflation
2. His purchasing power will INCREASE bc the interest will compound faster than the historical rate of inflation
3. His purchasing power will remain the SAME bc the interest rate is the same as the historical rate of inflation
4. His purchasing power will DECREASE bc the interest rate is lower than the historical rate of inflation

Question 5

You buy a bond with fixed coupon rate 5%. A year later, similar bonds that are issued have a coupon rate of 3%. Which of the following is TRUE?

Answer 5

1. The interest rate for your bond will fall to 3%
2. The price of your bond will increase
3. The price of your bond will stay the same
4. The demand for your bond will decrease

Question 6

Explain why it is important to start for retirement when you’re young, even though retirement is likely decades away.

Answer 6

It is important to start young because that way your retirement savings will have much more time and potential to grow. By investing early and staying invested, you can make compound earnings.

Question 7

An actively managed mutual fund..

Answer 7

1. Always performs better than an index fund
2. Is managed by a fund manager who charges a fee
3. Generally has lower fees than a passively managed index fund
4. Is a mix of two types of stocks and two types of bonds to diversify your portfolio

Question 8

Explain two key differences between index funds and mutual funds.

Answer 8

Index funds match the market and are passive

mutual funds try to outperform the market, have higher fees than index funds and are active

Question 9

Which of the statement below BEST describes the relationship between risk and return when considering an investment?

Answer 9

1. Investors expect to earn a higher return when they invest in a high risk asset
2. Investors expect to earn a higher return when they invest in a low risk asset
3. Investors expect to earn zero return when investing in a low risk asset
4. Investors expect to earn a lower return when they invest in a high risk asset

Question 10

1. Asset Allocation
2. Bear Market
3. Bond
4. Bull Market
5. Compound Interest
6. Risk
7. Stock
8. Portfolio
9. Investing
10. Mutual Funds

Answer 10

1. Dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash
2. A market in which prices are falling, encouraging selling
3. A security in which the investor loans money to a company or government, which then pays regular interest to the bondholder and returns the principal on the bond’s maturity date
4. A market in which there is increased stock trading and rising stock prices
5. Reinvesting earned interest back into the principal to allow money to grow exponentially over time
6. Degree of uncertainty on how likely the investor is to make money on a investment
7. A share of the value of a company, which can be bought, sold, or traded as an investment and which gives the investor small partial ownership of the company
8. A collection of financial investments like stocks, bonds, commodities, cash and cash equivalents, including mutual funds and ETFs
9. The process of setting money aside to increase wealth over time for long-term financial goals such as retirement
10. A collection of stocks and/or bonds combined into one fund which will be traded as a unit, typically chosen and actively managed by an “expert” in exchange for a fee from each investor

Question 11

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?

Answer 11

1. Profit of $800
2. Loss of $800
3. Profit of $350
4. Loss of $450

Question 12

What kind of behaviours can PREVENT people from making smart investing decisions?

Answer 12

1. Buying stocks when prices are low and selling them when they’re high
2. Exiting the market because that’s what everyone else is doing
3. Staying calm when the market is expecting a downturn
4. Investing in a diversified portfolio instead of trying to beat the market