Unit 6 Test Review - Investing

1) What is a key difference between saving and investing?

• Saving is for long-term goals; investing is for short-term goals
• Saving earns a much higher rate of return than investing your money
• Saving guarantees you the money you put away while investing has no guarantees.
• Saving earns compound interest while investing earns simple interest

2) Select the best definition of compound interest.

• Compound interest is earning interest on the original amount you deposited.
• Compound interest is earning interest on the original amount you deposited plus any interest earned.
• Compound interest is the amount of interest you are charged on your bank account each month.
• Compound interest is earning a fixed dollar amount on your bank account each month.

3) What is a stock?

• A stock is a share of ownership in a company.
• A stock is a lending investment to the government or a company.
• A stock is an insured bank account with high risk.
• A stock is a type of investment that uses money from investors to purchase many different investment types.

4) What type of market is described by a receding economy and a decline in the stock market?

• Bear Market
• Bull Market
• Pig Market
• Sheep Market

6) Duncan plans to invest all of his money in individual stocks. Why is this likely a bad investment strategy?

• He will need a large amount of money to invest in individual stocks.
• Purchasing individual stocks has a very low amount of risk and a low return.
• He will need to open multiple brokerage accounts for each stock he purchases.
• Purchasing individual stocks has a high amount of risk and little diversification.

7) Which statement best describes the risk level of bonds?

• Bonds are one of the riskiest investment types, but have the potential for a high return.
• Bonds have a moderate amount of risk, but are a riskier investment when compared to stocks.
• Bonds have a low to moderate amount of risk and are less risky than stocks.
• Bonds have no risk.

8) What is one way you can earn money by investing in bonds?

• Through interest collected on your original investment.
• Through dividends.
• By selling your shares in the bond.
• By purchasing a diversified bond type.

10) Which of the following is a characteristic of an index fund?

• High fees
• Insured
• Diversified
• Professionally managed

12) Mariam is young, willing to take a moderate amount of risk, but most importantly, wants an investment that is low-cost and diversified. Which is the best investment type for Mariam?

• A bond
• An individual stock
• A savings account
• An index fund

13) Which statement best describes how diversification impacts risk when you are investing?

• Diversification means spreading your money across multiple investments, which decreases risk.
• Diversification means spreading your money across multiple investments, which increases risk.
• Diversification means putting all of your money into one investment, which decreases risk.
• Diversification means putting all of your money into one investment, which increases risk.