Investing Test

Geraldo reviews his brokerage statement and sees the following two mutual fund investments that he made a year ago. ActiveFund20 had an average return (before fees) of 7.0% per year and an annual fee of 1%. PassiveFund500 had an average return (before fees) of 6.5% per year and an annual fee of 0.1%. Which investment had a better return for Geraldo (net of fees)? 

• ActiveFund20: It had an overall return of 8.0% while PassiveFund500 had an overall return of 6.6%           

• ActiveFund20: It had an overall return of 7.0% while PassiveFund500 had an overall return of 6.5%

• PassiveFund500: It had an overall return of 6.4% while ActiveFund20 had an overall return of 6.0%

• PassiveFund500: It had an overall return of 6.6% while ActiveFund20 had an overall return of 8%

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

• The price of your bond will increase      

• The demand for your bond will decrease

• The interest rate for your bond will fall to 3%

• The price of your bond will stay the same

Why are Index Funds such a popular investing option?

• They provide a low-cost, diversified investment option that closely matches the overall return of a given index,    such as the S&P 500    

• They are a mix of 2-3 individual stocks that can help you diversify your portfolio

• They are managed by robo-advisors that guarantee higher returns than the overall stock market

• They are actively managed by a fund manager 

As a shareholder in a public company, what are the benefits available to you? 

• You may receive dividends from the company, if the company pays them, and you have ownership of a portion of the company            

• You have ownership of a portion of the company and receive coupon payments from the issuer

• You can select members of the management team [e.g., the Chief Executive Officer (CEO)] and vote for members of the Board of Directors

• You must receive dividends from the company (all companies must pay them) and you can select members of the management team (e.g., the Chief Executive Officer (CEO))

Sanjana is explaining what Social Security is to her younger brother. Which of the following descriptions should she use? 

• Social Security is a type of retirement savings plan that you can open through a brokerage firm

• Social security is a government mandate that requires employers to offer their employees a 401(k) or pension plan

•   Social Security is a type of retirement savings plan offered by some employers

• Social Security is a government program that pools contributions from current workers to fund retirement support benefits to those who are eligible

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              

• Invest in a diversified portfolio

• 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

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 take advantage of my employer’s matching contribution? 

• Do I want to take on more or less risk? 

• Do I want to pay taxes now or later?

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 will automatically adjust his asset allocation based on the retirement year he has chosen

• A TDF is insured by the federal government, so Sam's money is protected even if the fund performs poorly

• A TDF buys a single stock and bond so that beginner investors can practice day trading

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 don’t have any input as to how your portfolio is invested

• You may not be able to get advice from a human financial advisor when you want it

• You’ll be put on a waitlist to use the robo-adviser since there are only a handful of them to choose from

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 the full $150/mo to the 401(k) because her company will match that full amount, "doubling" her investment every month

• 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