Study Guide PF

Why is diversification a recommended investment strategy?

Diversifying your portfolio helps reduce risk

A 401k is a federal program that provides monthly benefits to millions of Americans including retirees, miliary, families, surviving families of deceased workers, and disabled individuals

False

Describe two factors that can influence an individual company´s stock price

1. Demand and supply can because when more people are buying stocks vs selling stocks the price of the stock will go up 2. How well a company is doing financially has an affect because if they are doing good then their stock prices are higher

Explain two key differences between-either comparison A) index funds and bonds, comparison B) 401(k)s and IRAs, OR comparison C) large cap stocks and small cap stocks

401(k)s are something that your employers offer you and an IRA is an individual retirement account that you have to open on your own.

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

Treasury bond

A bond, generally considered to be a risk-free investment, issued by the U.S. government

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 401k because her company will match that full amount ¨doubling¨ her investment every month.

What is the biggest question an investor should ask themselves before investing in a Roth IRA or a Traditional IRA

Do I want to pay taxed now (Roth IRA) or later (Traditional IRA)

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

Jeff - 22 years old with low risk tolerance level - just started his first job, and knows he should start saving for retirement. He wants to divide his investments between stocks and bonds only. Give Jeff specific asset allocation advice (using percents) and briefly explain why you are suggesting this plan

I think Jeff should put 80% into stocks and 20% into bonds because since he is young he has time to recover from risks.

Josie is trying to figure out how to implement her investing strategy. She wants to compare online brokers, financial advisors and robo-advisors. What are 2 questions that she should consider during her research? Note: You don't need to answer the questions, only ask them.

How much knowledge do I have on investing? How can I get the best reward for my risk?

Advice for Gru

I would start with accepting the 401(k) from your employer. These are really good because when you invest 3% of your money each month, your employer will match you and it will become 6% each month. Another thing you could do is try out the stock market. Although it can be risky, if you are smart it can also make you a lot of money.

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 higher return when they invest in a high risk asset like stock in a small company

Explain why it is important to start saving for retirement in your 20s when retirement is likely four decades in the future.

It is important because you are going to need over a million dollars if you want to retire comfortably. It is easier when you start when you are young and have more time so it is not as stressful

What is a brokerage account used for?

It's a type of account used to buy and sell stocks, bonds, and mutual funds, etc.

To open a brokerage account, you...

Must be able to transfer money from a checking or savings account

An individual retirement account that allows a person to set aside after-tax income up to a specified amount each year.

Roth IRA

Investing

The process of setting money aside to increase wealth over time for long-term financial goals such as retirement

Why are index funds such a popular investing choice?

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 in, they sell the stock at a higher price than what they bought it for, or they execute a successful short sale

Risk is the degree of uncertainty on how likely the investor is to make money on an investment

True

When investing in individual stocks, you should expect that...

Unforeseen company events can have a dramatic impact on the stock price for a company

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

Nancy is a beginner level investor and is eager to get started. All of the following are things she should do EXCEPT... a. estimate how much she will need for retirement to determine how much she needs to invest each month b. invest in a diversified portfolio c. pick individual stocks to see if she can beat the market d. invest in a low cost index fund

c. pick individual stocks to see if she can beat the market