Investing Unit Test

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.

A disadvantage of using a robo-advisor might be that...

You may not be able to get advice from a human financial advisor when you want it.

Why is diversification a recommended investment strategy?

Diversifying your portfolio helps reduce risk

Identify two factors that can influence an individual company's stock price.

Supply and demand & News about the company.

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 or they sell the stock at a higher price than what they bought it for.

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.

What fees come with this service and what level of support does this service offer me.

ESSAY: Your friend Jasmina is excited that you took personal finance this semester and comes to you for investing advice. She tells you: etc.

A 401k is a retirement plan offered by your employer. Investing in one stock is unwise. She should contribute the max amount to her 401K. When picking funds she should compare what she has in her 401K. She can open a retirement plan and not be influenced by others and social media.

Sam is 22, just started his first full-time job, and is selecting his investments through his company's 401(k) plan. Why might a target date fund (TDF) be a good option for Sam?

A TDF will automatically adjust his asset allocation based on the retirement year he has chosen.

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 a company.

Which of the following accurately describes a difference between an individual bond compared to a bond fund?

A bond is considered to be a less diversified investment than a bond fund.

Explain three key differences between index funds and mutual funds.

Index funds are passive investments while mutual funds are active investments, Mutual funds try to beat the stock market while index funds try to mirror it, and Mutual funds have higher fees than index funds.

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.

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 funds.

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 7.0% 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 new to investing 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.

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.)

Profit of $350

Sanjana is explaining what Social Security is to her younger brother. Which of the following descriptions should she use?

Social Security is a government program that pools contributions from current workers to fund retirement support benefits to those who are eligible.

You buy a bond with a fixed coupon rate of 5%. A year later, similar bonds that are issued have a coupon rate of 3%. Which of the following is TRUE?

The price of your bond will increase

Explain why it is important to start saving for retirement when you're young, even though retirement is likely decades away.

You build a habit of saving for retirement early on.

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 the 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 rick you are comfortable with.

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

80% in stocks and 20% in bonds. He is younger and has more time to use this plan.

Which of the following statements is TRUE about compound 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.

What is one question an investor should ask when deciding whether or not they would like to open a Roth IRA or a Traditional IRA?

Do I want to pay taxes now or later?

Which of the following is a characteristic of dollar-cost averaging?

Dollar-cost averaging is a way to decrease your risk.

What kinds of behaviors can PREVENT people from making smart investing decisions?

Exiting the market because that's what everyone else is doing.

Daniel has saved $2,000 in a savings account that earns 0.5% interest annually. What will most likely happen to the purchasing power of his savings over time?

His purchasing power will DECREASE because the interest rate is lower than the historical rate of inflation.