PERSONAL FINANCIAL LITERACY EXAM

If a publicly traded corporation has a positive cash flow, it may

• become less liquid.

• go into debt.

• pay dividends.

• increase net income.

Answer explanation

A positive cash flow indicates that the company is generating more cash than it is using. That means that the company will be able to use that cash to pay dividends to shareholders, for example.

If you are investing for a goal that you hope to reach within three years, you are investing for a(n)

• short-term time horizon.

• intermediate-term time horizon.

• long-term time horizon.

• risk-tolerant time horizon.

Answer explanation

A short-term time horizon means you are investing for a goal you want to reach in less than five years; if you are investing for a three-year goal, you are on a short-term time horizon. An intermediate-term time horizon is 5-15 years, and a long-term time horizon is more than 15 years.

Alex wants to conduct a fundamental analysis of a company's stock. What information does he need to examine?

• All internal and external business factors

• The stock's past performance

• Economic factors that may impact its value

• The company's financial reports

Answer explanation

A fundamental analysis evaluates a security to assess its value and should include an examination of all external factors, such as the economy and industry conditions.

Which of the following is essential for making wise investment decisions:

• Knowledge

• Intelligence

• Age

• Wealth

What is the main purpose of diversifying investments?

• To avoid penalty fees

• To reduce risk

• To increase liquidity

• To eliminate income tax

Answer explanation

Diversifying investments means investing in multiple places rather than putting all of your money in one investment option. If you invest in multiple companies, it is unlikely that they all will fail.

What is an example of an internal stock information resource?

• Brokerage firm research

• The Value Line Investment Survey®

• A company's annual report

• A financial website portal

Answer explanation

A company's annual report is an example of an internal resource because it comes from the company itself.

The Value Line Investment Survey®, brokerage firm research, and financial website portals are all examples of external stock information resources.

A potential investor can assess a stock's volatility by comparing the highest paid price in the past 52 weeks with the

• estimated dividends.

• rate of return.

• price-earnings ratio.

• lowest paid price in the past 52 weeks.

Answer explanation

If a stock's price rises or falls sharply, it is said to be volatile, which means investors can earn or lose a great deal of money by owning the stock.

Rate of return is the reward or benefit received in return for an investment and is recorded as a percentage of the investment. Price-earning ratio (PE) is the financial ratio that shows how much investors are willing to pay for each dollar of earnings. A dividend is a portion of a company's profits paid to shareholders, usually on a quarterly basis. The rate of return, price-earnings ratio, and estimated dividends would not give investors enough information to analyze the stock's volatility.

Jessica wants to evaluate the rate of return for a particular stock. What component of the stock table should she review?

• Ticker

• Volume

• Yield percentage

• Net change

Answer explanation

The yield percentage refers to the rate of return on the security and is determined by dividing the dividend by the actual closing price. When evaluating the yield percentage, it is important to keep in mind that a stock with a high dividend yield is typically less volatile than one with a low yield. Investors often compare the yield percentages of similar companies with different stock prices to make investing decisions.

The purpose of the risk pyramid is to show a comparison of

• one investment to another.

• one stock to another.

• corporate bonds to municipal bonds.

• stocks to stock mutual funds.

Answer explanation

With high-, moderate-, and low-risk categories, the pyramid helps you see which investments are more or less risky than others. Near the peak are the riskiest investments, while the most reliable returns are at the base.

Why is it important for individuals to establish investment goals?

• To achieve plans for the future

• To buy common stock

• To reduce overall debt

• To borrow capital