Investing and Retirement Unit Test
What kinds of cognitive biases and behaviors can prevent people from making smart investing decisions?
Exiting the market because that's what everyone else is doing
How is a bond different from a stock?
A bond is a loan you give to an organization while a stock is partial ownership in the company.
Your friend Jenny wants to use a robo-adviser to manage her portfolio. What does this mean?
A computer software system is going to adjust her portfolio based on her preferences.
Why is compound interest more advantageous than simple interest?
Compound interest allows you to earn interest not only on the amount you have saved, but also on the interest you've already earned
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?
Contribute the full $150/mo to the 401(k) because her company will match that full amount, "doubling" her investment every month.
Why is diversification a recommended investment strategy?
Diversifying your portfolio helps reduce risk.
What is one question an investor should ask before investing in a Roth IRA or a Traditional IRA?
Do I want to pay taxes now (Roth IRA) or later (Traditional IRA)?
Which of the following statements about Exchange Traded Funds (ETFs) is TRUE?
ETF prices can change throughout the day as they are exchanged on the market.
You bought 10 shares of stock in StreamingVideoCo for $45 per share. Two months later you sold the 10 shares of stock for $80 per share. What was your profit or loss on StreamingVideoCo stock? Assume that StreamingVideoCo didn't pay a dividend and that you didn't incur any trading fees during that period.
Gain of $350
Elaine has been saving for a while and has $1,000 to invest. She would like this $1,000 to be the start of her retirement fund. What do you think is a good long-term investment strategy for Elaine?
Invest $800 in a stock index fund and $200 in a bond index fund
How does investing in the stock market differ from putting money in a savings account at a bank?
Investing allows you to accumulate wealth for retirement while saving is best for short-term purchases or emergencies
Which of the statements below BEST describes the relationship between risk and return when considering an investment?
Investors expect to earn a higher return when they invest in a high risk asset like stock in a small company
An actively managed mutual fund...
Is managed by a fund manager who charges a fee
What is a brokerage account used for?
It's a type of account used to buy and sell stocks, bonds, and mutual funds.
To open a brokerage account, you...
Must be able to transfer money from a checking or savings account.
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% 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)?
PassiveFund500: It had an overall return of 6.4% while ActiveFund20 had an overall return of 6.0%
Nancy is a beginner level investor and is eager to get started. All of the following are things she should do EXCEPT...
Pick individual stocks to see if she can beat the market
Why are Target Date Funds (TDFs) becoming an increasingly popular option to invest in?
Target Date Funds automatically adjust the allocation between stocks and bonds as you age
What is a vesting period?
The period of time it takes for shares in an employer retirement plan to be owned fully by the employee
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
How can someone make money from investing in a stock?
They receive dividends from the company they bought the stock of and/or they sell the stock at a higher price than what they bought it for.
When investing in individual stocks, you should expect that...
Unforeseen company events can have a dramatic impact on the stock price for a company
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 a company
A disadvantage of using a robo-adviser might be that...
You may not be able to get advice from a human financial advisor when you want it
Why is it important for you to understand YOUR risk tolerance before you start investing?
You should tailor your investment portfolio so that it assumes an amount of risk you are comfortable with.
