Investing - Unit Test

First Name:

Last Name:

16. Katrina works for Penny's Pickles, which offers a 401(k) match for 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?

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

17. A disadvantage of using a robo-adviser might be that…

• You are charged higher fees than if a human fund manager adjusted your portfolio
• You may not be able to get advice from a human financial advisor when you want it
• You don’t have any input as to how your portfolio is invested
• You’ll be put on a waitlist to use the robo-adviser since there are only a handful of them to choose from

18. Sam is 22, just started his first full-time job, and is selecting his investments through his company's 401(k) plan. Why might a target date fund (TDF) be a good option for Sam?

• A TDF is actively managed by a fund manager but comes with low fees
• A TDF buys a single stock and bond so that beginner investors can practice day trading
• A TDF is insured by the federal government, so Sam's money is protected even if the fund performs poorly
• A TDF will automatically adjust his asset allocation based on the retirement year he has chosen

19. What is one question an investor should ask when deciding whether or not they would like to open a Roth IRA or a Traditional IRA?

• Do I want to make a guaranteed return of 6% or 8%?
• Do I want to pay taxes now or later?
• Do I want to take advantage of my employer’s matching contribution?
• Do I want to take on more or less risk?

20. Nancy is new to investing and is eager to get started. All of the following are things she should do EXCEPT...

• Invest in a low cost index fund
• Estimate how much she will need for retirement to determine how much she needs to invest each month
• Pick individual stocks to see if she can beat the market
• Invest in a diversified portfolio

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