Unit 3 Investing Review

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

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

• Dollar-cost averaging is a way to decrease your risk

• Dollar-cost averaging is a strategy that only expert investors use

• Dollar-cost averaging is advantageous because earnings are untaxed

• Dollar-cost averaging is offered exclusively through robo-advisors