Financial Literacy Study Guide

The goal of an actively managed fund is to outperform the market. What does this mean?

The fund is managed by a fund manager, who tries to beat the overall market's rate of return

Which type of retirement account is an investment option for ANY young person? a. Traditional IRA b. Pension c. 401(k) d. Social security

Traditional IRA

One difference between bonds and bond funds is... a. A bond fund can help you diversify your investment portfolio b. Buying an individual bond is generally cheaper than buying a bond fund c. Bonds pay dividends to its investors d. You receive the principal amount you invest in a bond fund after a certain amount of time

A bond fund can help you diversify your investment portfolio

Which of the following most accurately describes what a bond is? a. A bond is an investment in which an investor lends money to a corporation or government with the expectation that it will be paid back with interest b. A bond is a government loan made to a corporation with the expectation that it will be paid back with interest c. A bond is an investment in which a corporation lends an individual investor money with the expectation that it will be paid back with interest d. A bond is a government loan made to an individual investor with the expectation that it will be paid back with interest

A bond is an investment in which an investor lends money to a corporation or government with the expectation that it will be paid back with interest

When talking about investing, what does it mean when someone refers to a fund?

A pool of money from shareholders that is used to invest in a collection of assets like stocks and bonds

Which of the following statements BEST describes investing? a. Buying assets, like stocks, with the intention to hold them and grow your wealth over the long term b. Putting $100 per month into an FDIC-insured bank account for short-term goals c. Buying and selling stocks within the same day to take advantage of short-term price variation d. Reducing the purchasing power of your money over time

Buying assets, like stocks, with the intention to hold them and grow your wealth over the long term

All of the following are risks of owning an individual stock, EXCEPT a. Demand could unexpectedly increase for your company's stock b. The stock price could decrease and you could lose money c. Unforeseen developments could cause the company to go out of business d. Stock prices are hard to predict in the short-term

Demand could unexpectedly increase for your company's stock

All of the following are strategies to reduce risk EXCEPT... a. Making sure your investments are diversified b. Hiring an investment manager who you think can beat the market c. Holding your investments for at least five years d. Investing small amounts of money over longer periods of time

Hiring an investment manager who you think can beat the market

401(k)s and IRAs are both... a. Investment accounts that you can open to help you invest for retirement b. Types of investments that you can choose to have in an investment account c. Investment accounts that are commonly offered by employers d. A type of savings account that generally offers around a 1% rate of return

Investment accounts that you can open to help you invest for retirement

Leaving your investments in the stock market alone for at least five years is a good way to reduce risk because... a. You get a bonus from the company if you invest for five years b. Fees are waived for investments held for over five years c. It allows your investments to earn more interest d. It keeps you from reacting to dips in the market and selling at too low of a price

It keeps you from reacting to dips in the market and selling at too low of a price

An investor can best harness the power of compounding by doing all of the following, EXCEPT... a. Making frequent trades b. Starting to invest early c. Reinvesting earnings d. Minimizing risk

Making frequent trades

Which of the following statements about the stock market is true? a. Over time, the stock market averages 6-7% growth per year. b. A bear market is one where stock prices are trending upwards. c. We've been in a bull market for the last 20 years. d. Stocks are a low-risk short-term investment because trends are predictable.

Over time, the stock market averages 6-7% growth per year.

All of the following are true about a passively managed fund EXCEPT... a. Passively managed funds are generally seen as low risk investments b. Fees for a passively managed fund are typically lower than those for an actively managed fund c. A passively managed fund guarantees the average return of the securities it includes d. Passively managed funds are managed by a fund manager

Passively managed funds are managed by a fund manager

Which of the following is an example of diversification? a. Purchasing shares of stock in a variety of companies and industries b. Putting the majority of your money into a savings account and investing the rest c. Using multiple investment managers to get different opinions d. Investing different amounts of money every month

Purchasing shares of stock in a variety of companies and industries

How can you make money from investing in a stock?

Sell the stock for more than your purchase price

Juan buys a bond with a fixed coupon rate of 3%. Six months later, similar bonds that are issued have a coupon rate of 4%. Which of the following is TRUE if he chooses to sell the bond before maturity? a. The price of Juan's bond will decrease b. The interest rate of Juan's bond will increase to reflect the current market c. More investors will be willing to buy Juan's bond d. The price of Juan's bond will increase

The price of Juan's bond will decrease

All of the following are reasons to invest, EXCEPT... a. To earn a consistent rate of return with lower risk than typical savings accounts b. To minimize the impact on inflation, which causes you to lose purchasing power c. To build wealth by reinvesting your returns and allowing them to compound d. To earn higher average rates of return than you would in a typical savings account

To earn a consistent rate of return with lower risk than typical savings accounts

All of the following are advantages of a 401(k), EXCEPT... a. You can invest your 401(k) into a wider variety of asset types than you can with an IRA b. You don't pay taxes on your investments' growth each year c. Your employer may match some of your 401(k) contributions d. You can contribute more money into a 401(k) than into an IRA

You can invest your 401(k) into a wider variety of asset types than you can with an IRA