Personal Finance: Investing Basics

Putting money into a savings account with interest is the ideal way for a young adult to invest.

False

Between cash, stocks, and bonds, cash is typically considered the least risky.

True

Historically, stocks have had far greater annual returns than cash, government bonds, and saving accounts.

True

There are investment options even riskier than stocks.

True

Your risk tolerance for investing should be determined by these two factors:

Your time horizon and when you will need access to the money

Since stocks are generally more risky than bonds, investors should expect to recieve LOWER returns from stocks.

False

We already know what the inflation rate will be in the year 2020, and we can use this information to make wise investments.

False

You are guaranteed to lose money when you invest while putting your money in a savings account is risk-free.

False

You want the inflation rate to be higher than the interest you're earning on your investments.

False

Why is compound interest more advantageous than simple interest?

In compound interest, you earn interest on not only your principal, but also on the interest you've already made.

An investor should expect a higher return when investing in stocks compared to the return from a FDIC-insured savings account.

True

Between cask, stocks, and bonds, bonds are typically considered the riskiest.

False

Historically, US inflation has been roughly 30%.

False

Imagine that the interest rate on your savings account is 1% a year and inflation is 2% a year. After one year, would the money in the account but more than it does today, exactly the same or less than today?

Less

You deposit a $1,000 into a five year certificate of deposit (a type of savings account with a fixed rate of interest) earning 1% per year that compounds interest annually. After five years, the balance in your account will be...

More than $1050

Justin wants to go spend a month traveling Europe next summer but doesn't have the money to do so. He's thinking of investing $700 he currently has saved in stock in his favorite resturaunt in hopes of earning the oney for the vacation. Why shouldn't he do that?

All of the answers are correct.

If you are fearful about losing money you should always put your money in a savings account and never invest.

False

If you invest in stocks you are guaranteed a 7-9% return while savings accounts have interest rates of about 1%.

False

If you invest your money, you don't need to worry about inflation.

False

Investing in riskier assets (ex. start-up companies) will guarantee a higher return for investors.

False

Investors in bonds can expect to lose money since companies often go bankrupt.

False

It's better to buy an expensive item now on a credit card, because in the future, inflation will cause it to be more expensive.

False

Since investing in the stock market carries with it higher risk, it also has a higher expected return than stashing your money in a savings account.

True

The returns you gain from investing in the stock market vary year to year but over the longterm have averaged about 7-9% which is higher than one can expect to earn in a savings account.

True

When it comes to investing, risk and return have a direct relationship, in that the riskier an investment, the higher its expected return.

True