Principles of Investment

What is the relationship between risk and return? A higher risk often means a higher return. A lower risk always means a higher return. A higher risk often means a lower return. A lower risk will always mean a lower return.

A higher risk often means a higher return.

Which of these are considered both short- and long-term investments? Check all that apply. *CDs *stocks *savings accounts mutual funds bonds *commodities

*CDs *stocks *savings accounts *commodities

Which is a commodity someone might invest in? a mutual fund *natural resources government bonds a certificate of deposit

*natural resources

Who regulates markets where investments are traded? individual investors *the federal government corporate entities financial institutions

*the federal government

Risk and Return Which type of investment would be an example of an investment at point B? a US savings bond a CD a stock a savings account

A stock

The image shows Gale's investments during one year. What does the information demonstrate about Gale's investments? If she had purchased only the stock and had not diversified her investments, she would have lost money. If she had diversified her investments further, her profits would have been considerably larger. If she had put money in her savings account only and had not diversified, her profits would grow. If she had diversified her investments further, she would have reduced her risk but made less of a profit.

If she had purchased only the stock and had not diversified her investments, she would have lost money.

If the Federal Reserve decreased the money supply, what would the effects be? Check all that apply. decreased interest rates increased interest rates decreased borrowing increased borrowing decreased investing increased investing

Increased interest rates Decreased borrowing Decreased investing

An investment with a stable and predictable history will most likely have: no risk. low risk. medium risk. high risk.

Low risk

What is the definition of risk? putting money into more than one investment amount made in profit on an investment using borrowed funds for an investment possibility of losing money on an investment

Possibility of losing money on an investment.

Which investment is best for someone who is likely to need cash soon? mutual fund CD 401(k) savings account

Savings account

The nominal interest rate could best be described as the ______ rate.

Stated

Which is an example of a high-risk investment? stock in a start-up company bond CDs from an insured bank 401(k)

Stock in a start-up company

Why is it risky to invest in a commodity? A commodity has little or no value as a long-term investment. Commodity stocks cannot be traded after you purchase them. The commodity's price might drop significantly very quickly. The investment will tie up your money for more than one year.

The commodity's price might drop significantly very quickly.

Which statement is true of the relationship between risk and return? The greater the risk, the greater the potential return. The relationship between risk and return varies. The greater the risk, the lower the potential return. The relationship depends on the individual investment.

The greater the risk, the greater the potential return.

Long-term investments tie up money for ✔ more than one year One reason why individuals focus on long-term investments is to pay for immediate expenses✔ save for their retirement A(n) ✔ 401(k) allows both employees and employers to contribute to a retirement account.

more than one year/save for their retirement/401(k)

Talia bought a house in an up-and-coming neighborhood at a low price. She hopes to sell it one day at a much higher price. This is investing ✔ in an asset Nathan has purchased a CD from his local bank. He will deposit money over a period of five years, with the plan of making more. This is investing ✔ by loaning funds. Maria bought a collection of first-edition books by her favorite author. She will not read them. Instead, she will store them carefully with the plan of selling them one day to make a profit. This is investing ✔ in an asset

✔ in an asset/✔ by loaning funds./✔ in an asset

When investors purchase a commodity, they believe: the commodity's price will go up after purchase. the bank will pay interest to the investors. the investors' employer will match the cost. the commodity is guaranteed to make them money.

The commodity's price will go up after purchase.

Why should investors know the difference between nominal and real interest rates? to know what they are likely to lose to understand changes in monetary policy to guarantee an investment's profitability to recognize the effects of inflation

To recognize the effects of inflation.

Annie invested in a set of stocks and made $4,000 in profit. She has learned that she will have to pay taxes on the profit she has made. Here are the tax rates affecting Annie's investment: State tax: 5% Federal tax: 25% Annie must pay ✔ $200 in taxes to the state government on her investment. She also must pay $1,000 in taxes to the federal government. As a result of the money she will lose to taxes, the real value of Annie's profit is $2,800

✔ $200/$1,000/$2,800

Amber paid $2,000 in taxes to the federal government on her investment. She also paid ✔ $500 in taxes to the state government. After the broker's fee is subtracted, the real value of the profit Amber made is $7,000

$2,000 /$500 / $7,000

If an investor has a $5,000 pretax return, the state tax rate is 4.5%, and the federal tax rate is 22.0%, what is the real investment value? $1,325 $3,675 $3,900 $4,775

$3,675

Patrick has successfully invested in a growing tech company. Three years ago he invested $10,000 in the company through a broker. Now he has decided to sell his stock. The value of his stock is now at $17,000. Here are the taxes and fees associated with his investment: Annual brokerage fee: $25 State tax: 5% of profit Federal tax: 25% of profit Inflation rate: 1% per year The state tax Patrick must pay on the initial profit is ✔ $350. The federal tax he must pay on the initial profit is ✔ $1,750 The inflation on the amount remaining after taxes is $147. As a result, the real value of Patrick's profit is $4,678.

$350/$1,750/$147/$4,678.

Michael has been saving his money and wants to invest it. After doing some research, he has decided to invest $20,000 into a Certificate of Deposit. The interest rate on the CD is 3% with a term of five years, and the interest is paid out annually. Based on recent inflation, Michael is planning on an annual inflation rate of 2%. How much interest will Michael earn on this CD in the first year, based on the real interest rate? *$200 $600 $1,000 $1,400

*$200

Pablo recently lent $5,000 to his friend Kristine to open a bakery. She promised to pay him back with interest within one year. Pablo and Kristine agreed on a nominal interest rate of 5.5 percent. If the annual rate of inflation is 0.5 percent, what kind of profit can Pablo expect to receive for his investment? How much interest will Pablo receive from his investment? $200 due to a real interest rate of 4 percent *$250 due to a real interest rate of 5 percent $300 due to a real interest rate of 6 percent $350 due to a real interest rate of 7 percent ️ Add New NoteHide Advanced

*$250 due to a real interest rate of 5 percent

Michael has been saving his money and wants to invest it. After doing some research, he has decided to invest $20,000 into a Certificate of Deposit. The interest rate on the CD is 3% with a term of five years, and the interest is paid out annually. Based on recent inflation, Michael is planning on an annual inflation rate of 2%. How much interest will Michael earn on this CD in the first year, based on the nominal interest rate? $400 *$600 $800 $1,000

*$600

Angela has $2,000 that she wants to invest. She knows that she will not need this money for at least one year. She is looking for an investment that is guaranteed to make her money, and she wants to choose something that is low risk. Which investment options should Angela consider? stocks commodities mutual funds *CDs

*CDs

Which rule is important to remember when evaluating risk? Long-term investments tend to be less risky. There is no connection between risk and return *Investments believed to be unpredictable are more risky. The demand tends to be higher for high-risk investments.

*Investments believed to be unpredictable are more risky.

Which statements are true regarding an individual retirement account? Check all that apply. Employers create them and match employee contributions. *People can contribute to the account until retirement age. People can withdraw money penalty-free at any time. *Contributions to the account are limited each year. *Contributions can be deducted from federal taxes.

*People can contribute to the account until retirement age. *Contributions to the account are limited each year. *Contributions can be deducted from federal taxes.

Which investment advice would Gale most likely give to Alex? Invest in stocks because they are less risky. Put most of your money in a savings account instead. *Spread your investments in several different areas. Stick with the stocks because they will bounce back

*Spread your investments in several different areas.

People who make money investing in the stock market get certain tax breaks. should sell quickly to avoid taxes. have to pay a fee to keep a stock. *must pay taxes on profits.

*must pay taxes on profits.

What should investors consider when planning for their retirement? Check all that apply. *the amount an employer will match for a 401(k) the contributions an employer will make to an IRA *the ideal age to establish a particular retirement plan *the amount an investor is allowed to contribute annually *the tax laws and breaks related to different retirement plans the amount that can be withdrawn early without getting taxed

*The amount the employer will match for 401k *The ideal age to establish a particular retirement plan *The amount an investor is allowed to contribute annually *The taxes laws and breaks related to different retirement plans the amount that can be withdrawn early without getting taxed

Juan is always researching different investment options. A few weeks ago he noticed some nice homes for sale in his neighborhood. The listed prices were below market value. Today on the news he heard that the Federal Reserve lowered interest rates for banks and that banks have lowered interest rates for home mortgages in turn. As a result, there has been a huge boom in the number of people purchasing homes. What is most likely to happen as a result of the change in interest rates? Housing prices will go up and down due to changing fiscal policy. *The market will experience more demand and the price of houses will go up. The price of houses will go down in response to the decreased demand. The prices for homes in that area will be stable due to the new monetary policy.

*The market will experience more demand and the price of houses will go up.

Michael has been saving his money and wants to invest it. After doing some research, he has decided to invest $20,000 into a Certificate of Deposit. The interest rate on the CD is 3% with a term of five years, and the interest is paid out annually. Based on recent inflation, Michael is planning on an annual inflation rate of 2%. Which statement best explains the interest rates related to this CD? The nominal interest rate is 3 percent, while the real interest rate is 2 percent. *The nominal interest rate is 3 percent, while the real interest rate is 1 percent. The nominal interest rate is 1 percent, while the real interest rate is 2 percent. The nominal interest rate is 2 percent, while the real interest rate is 4 percent.

*The nominal interest rate is 3 percent, while the real interest rate is 1 percent.

Which are common mistakes people make when investing? Check all they apply. *They put all of their money into one kind of investment at a time. They divide their funds between more risky and less risky options. They analyze their comfort level with the types of risk they will take. *They invest more money than they can afford. *They focus heavily on familiar investment opportunities. *They hold onto investments longer than they should to recoup losses.

*They put all of their money into one kind of investment at a time. *They invest more money than they can afford. *They focus heavily on familiar investment opportunities. *They hold onto investments longer than they should to recoup losses.

What are some characteristics of short-term investments? Check all that apply. *They usually last for less than a year. *They are considered low risk. They typically include both stocks and bonds. They typically help investors save for retirement. *They can include savings accounts and CDs.

*They usually last for less than a year. *They are considered low risk. *They can include savings accounts and CDs.

William is not generally a risk-taker, but he knows he may need to step out of his comfort zone to make enough money for retirement. Which investment option would best meet William's needs? a US savings bond a savings account *a commodity a certificate of deposit

*a commodity

Which investor is making a common error? an employee of a popular hardware store who invests only in that company's stock *an employee of a popular software company who invests in many similar companies someone who sells the slumping stock while they are still able to make a profit based on what they paid someone who buys stock in both domestic and more risky international companies

*an employee of a popular software company who invests in many similar companies

Julia has a tip from a friend about a new company that is about to release an innovative new smartphone. If the technology succeeds, the company could make millions of dollars. However, the company has not released a product like this before, its executives are inexperienced, and it faces strong competition from many other companies in its industry. Julia has never heard of the company before, but she is considering investing $1,000 in its stock. This investment is best considered high risk with the potential for a low return. *high risk with the potential for a high return. low risk with the potential for a low return. low risk with the potential for a high return. ‍

*high risk with the potential for a high return.

What should an investor consider when making an investment? Check all that apply. *the rate of inflation, which could affect the value of the return *the history of the investment, which will indicate the level of risk *any taxes that will need to be paid at the state and federal levels the nominal interest rate, which will show the real profit to be made the length of the investment, because long term always means high risk *the level of risk, because the higher it is, the higher the potential loss is

*the rate of inflation, which could affect the value of the return *the history of the investment, which will indicate the level of risk *any taxes that will need to be paid at the state and federal levels *the level of risk, because the higher it is, the higher the potential loss is

The image shows Alex's investments in one year. What does the information demonstrate about Alex's investments? He should have invested in a commodity instead of a stock. He would have lost more with a higher-risk investment. He most likely would have benefited by diversifying. He most likely would have profited by buying more of the stock.

He most likely would have benefited by diversifying.

If the nominal interest rate is 4.00% and the rate of inflation is 2.25%, what is the real interest rate? 1.75% 4.50% 6.25% 9.00%

1.75%

The graph shows the effect of inflation. Approximately how much of the initial investment's value would be lost after 15 years at 3% inflation? 15% 20% 40% 50%

40%

In what way does a 401(k) differ from an individual retirement account (IRA)? A 401(k) is created through an individual's employer. A 401(k) can be created by individuals who deposit money. A 401(k) allows consumers to contribute before taxes. A 401(k) is a good long-term investment strategy.

A 401(k) is created through an individual's employer.

Changes in monetary policy have the greatest effect on: income tax rates. service fees and expenses. demand for investments. government spending.

Demand for investments.

______ policy involves government changes to spending or taxation to affect the economy.

Fiscal

How is a savings account most useful? for saving for a long time without withdrawing for depositing and withdrawing money frequently for using money for CDs and other investments for using money in the near future but not right away

For using money in the near future but not right away.

What occurs over time as a result of inflation? Check all that apply. Interest becomes worth less money. The dollar's value becomes unstable. Interest rates decrease. Interest rates fluctuate in value. The dollar's future value changes.

Interest becomes worth less money. The dollar's future value changes.

Taxes are often owed on: initial investments. the current value of investments. the real value of investments. investment returns.

Investment returns

Which statements apply to a certificate of deposit (CD)? Check all that apply. It is always purchased as a short-term investment. It can be purchased from a banking institution. It is always purchased as a long-term investment. It can be purchased for almost any amount. It is purchased through an individual's employer.

It can be purchased from a banking institution. It can be purchased for almost any amount.

Which statement best describes how inflation affects the value of investments over time? It erases the value of investments. It increases the value of money. It decreases the value of money. It controls the value of investments.

It decreases the value of money.

Which of these investments may be long term? Check all that apply. savings accounts mutual funds bonds retirement funds commodities

Mutual funds Bonds Retirement funds Commodities

What might convince an investor to buy stock or mutual funds? belief that a company has just reached its peak popularity news that a stock's price has recently increased significantly belief that a small number of investors have bought the stock so far news that a company is about to release a promising product

NOT: News that a stock's price has recently increased significantly. Perhaps: Belief that a company has just reached its peak popularity. OR News that a company is about to release a promising product.

Understanding the likelihood of failure is part of understanding the ✔ risks An investment will grow faster with a monthly ✔ compound interest rate. Investments with more liquidity include ✔ savings accounts. Investments with less liquidity include ✔ personal property

compound interest / savings accounts./personal property

Cody has invested $12,000 total. He has invested $3,000 in stocks, $2,000 in a certificate of deposit, and $5,000 in government bonds. Cody's stocks are currently performing poorly. He has purchased $2,000 worth of an automotive company's stock, and its value has steadily dropped over the last year. He is reluctant to sell the stock because he is worried about how much money he has already invested. Which investment practice is Cody following? diversifying investments Which investment shortcoming has he failed to avoid? ✔ focusing on sunk costs Which step should Cody take to improve his investment portfolio? ✔ sell the failing stock

diversifying investments/✔ focusing on sunk costs/sell the failing stock

Interest rates are generally expressed as a(n) percentage of the loan. The length of time before a loan must be repaid is called the ✔ term of the loan. Loans that are considered to be high risk typically have a ✔ high interest rate. Add New NoteHide Advanced

percentage/✔ term/ high

Analyzing the likelihood of the economy changing is part of understanding the risks of an investment.

risks

During a period of economic growth, investors are ✔ more likely to take risks and invest funds. Monetary policy is directly implemented by ✔ the Federal Reserve Fiscal policy seeks to affect the economy and interest rates by directly modifying taxation and spending. A decrease in the amount of money available to investors is most likely to result in ✔ less investment.

✔ more/ ✔ the Federal Reserve/ taxation and spending/ ✔ less investment.