Principles of Investment

Which investment advice would Gale most likely give to Alex?

*Spread your investments in several different areas.

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 can include savings accounts and CDs.

Which is a commodity someone might invest in?

*natural resources

Who regulates markets where investments are traded?

*the federal government

What should investors consider when planning for their retirement? Check all that apply.

*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

Changes in monetary policy have the greatest effect on:

Demand for investments.

An investment with a stable and predictable history will most likely have:

Low risk

What might convince an investor to buy stock or mutual funds?

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.

Which investment is best for someone who is likely to need cash soon?

Savings account

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

Stated

Which statement is true of the relationship between risk and return?

The greater the risk, the greater the potential return.

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

When investors purchase a commodity, they believe:

The commodity's price will go up after purchase.

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 high return.

What is the definition of risk?

Possibility of losing money on an investment.

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

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?

*$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?

*$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?

*CDs

Which rule is important to remember when evaluating risk?

*Investments believed to be unpredictable are more risky.

Which statements are true regarding an individual retirement account? Check all that apply. eeeeee

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

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?

*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 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 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.

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 software company who invests in many similar companies

People who make money investing in the stock market

*must pay taxes on profits.

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

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?

$3,675

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 level of risk, because the higher it is, the higher the potential loss is

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

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.

---percentage/✔ term/ high

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

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.

What is the relationship between risk and return?

-A higher risk often means a higher return.

Which is an example of a high-risk investment?

-Stock in a start-up company

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

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.

Which of these are considered both short- and long-term investments? Check all that apply.

*CDs *stocks *savings accounts *commodities

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

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?

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.

Which type of invterm-10estment would be an example of an investment at point B?

A stock

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

Fiscal

How is a savings account most useful?

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

The image shows Alex's investments in one year. What does the information demonstrate about Alex's investments?

He most likely would have benefited by diversifying.

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 the Federal Reserve decreased the money supply, what would the effects be? Check all that apply.

Increased interest rates Decreased borrowing Decreased investing

What occurs over time as a result of inflation? Check all that apply.

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

Taxes are often owed on:

Investment returns

Which statements apply to a certificate of deposit (CD)? Check all that apply.

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 decreases the value of money.

Which of these investments may be long term? Check all that apply.

Mutual funds Bonds Retirement funds Commodities

Why is it risky to invest in a commodity?

The commodity's price might drop significantly very quickly.

Why should investors know the difference between nominal and real interest rates?

To recognize the effects of inflation.

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)

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

risks