TEST: Unit 11 Investing

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25 questions

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Be sure to have completed the lessons for the Unit required for this Test.

Be sure to have completed the lessons for the Unit required for this Test.

Which of the following is TRUE, based on the historic returns of the S&P 500?

The stock market fluctuates in the short term and is difficult to predict. It has an average annual return of 6-7%, adjusted for inflation.

The stock market fluctuates in the short term and the majority of investors can predict the direction of the market. The stock market has an average annual return that is negative, adjusted for inflation.

On average, the growth of the stock market matches the rate of inflation. It has an average annual return of 2-3%, adjusted for inflation.

Stock prices rise consistently in the short term and only decrease during recessions. The stock market has an average annual return of 15%, adjusted for inflation.

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

Social Security is a type of retirement savings plan offered by some employers

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

Social Security is a type of retirement savings plan that you can open through a brokerage firm

Social security is a government mandate that requires employers to offer their employees a 401(k) or pension plan

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 INCREASE because the interest will compound faster than the historical rate of inflation

His purchasing power will remain the SAME because the interest rate is the same as the historical rate of inflation

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

His purchasing power will INCREASE because the interest rate is higher than the historical rate of inflation

All of the following are advantages of saving for retirement in a 401(k), EXCEPT...

Your 401(k) contributions are tax-deductible

A 401(k) has a higher contribution limit than an IRA

Some employers will match contributions to your 401(k)

You can withdraw money at any time without paying a penalty

What is a bond?

A type of loan you can get from a bank that you pay back with interest

A type of loan you can get from the federal government that you pay back with interest

An investment in which you loan money to another individual and are paid back with interest

An investment in which you loan money to a corporation or government and are paid back with interest and the principal that you originally lent to them.

How are active investing and passive investing different?

Active investing requires you to make a minimum number of trades per day while passive investing does not

Active investing requires a hands-off approach while passive investing requires a hands-on approach

Active investing typically has lower fees while passive investing typically has higher fees

Active investing is typically done by a fund manager trying to beat the market while passive investing typically involves investing in a popular index like the S&P 500

A commonly used strategy to minimize investing risk is...

Hiring an investment manager who promises to provide the largest returns

Investing in only one company

Investing only when a stock's value is rising

Diversifying across asset classes and within each asset class

Which of the following is TRUE about investing?

It can help you grow your money through the power of compounding

It involves little risk because your returns are insured up to $250,000

It is meant for achieving short-term financial goals

It guarantees a high rate of return over a short period of time

Which of the following is TRUE about pension plans?

Pension plans are becoming increasingly common among employers in the U.S.

More nonunion workers have access to pension plans than union workers

How much an employee gets from a pension depends on how long they’ve worked for the employer and how much they earn

Employees generally control the investments within a pension plan

Tracie is new to investing and is going to use an app that offers trades with zero fees. After opening her account, Tracie should first...

Hire an investment manager

Conduct research on the investments she's interested in

Limit herself to one small investment so she can't lose as much

Invest a large sum of money

Which of the following explains why risk is not always bad when it comes to investing?

Insurance will cover your investing losses

Gains realized from higher-risk investments are untaxed

As risk increases, so does the possibility of greater returns

Robo-advisors eliminate all risk

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

Dollar-cost averaging is riskier than lump sum investing

Dollar-cost averaging involves consistently investing small amounts of money over long periods of time

Dollar-cost averaging is advantageous because earnings are untaxed

Dollar-cost averaging is offered only through robo-advisors

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 is insured by the federal government, so Sam's money is protected even if the fund performs poorly

A TDF buys a single stock and bond so that beginner investors can practice day trading

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

A TDF is actively managed by a fund manager but comes with low fees

All of the following are risks of investing in a single stock, EXCEPT...

If the company does not issue new stock, current stockholders could lose their entire investment

If the company’s profits decline, the stock price could decrease

If the company goes out of business, stockholders could lose their entire investment

If the overall stock market declines, the stock price could decrease

All of the following should be considered when creating your investing strategy EXCEPT...

The amount of capital you have available to invest

Your credit score

The amount of time your money will be invested before you start drawing from it

Your risk tolerance

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

A bond is issued by a company while bond funds only invest in government bonds

A bond guarantees you a higher rate of return than a bond fund

A bond pays you dividends while a bond fund pays you regular interest

Exchange traded funds...

have become less popular among investors

are considered to be high-risk investments

can be traded throughout the day

typically aim to beat the overall market's performance

Which of the following is an advantage of using a robo-advisor compared to hiring most financial advisors?

Lower returns

Lower fees

Higher returns

Higher fees

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

The interest rate for your bond will fall to 3%

The demand for your bond will decrease

The price of your bond will stay the same

Aleah is 19 and wants to get a head start on investing and opens a brokerage account. All of the following are benefits of doing so EXCEPT...

It gives her access to invest in securities like stocks, bonds, and mutual funds

There is no limit on the amount of money she can invest in securities

Any realized gains would be exempt from capital gains tax

It allows her to withdraw funds without penalty

Ben is 24 and wants to start saving for retirement. What can he do to set himself up for success?

Invest 10-15% of his monthly salary

Invest primarily in low-risk investments like bonds

Wait until his 30s to start investing

Delay his expected retirement age by 20 years

What are the two ways investors can earn money from a stock?

A fixed interest rate on the investment and decreasing the stock’s market cap

Dividends and selling the stock at a higher price than they bought it

Dividends and decreasing the stock’s market cap

A fixed interest rate on the investment and selling the stock at a higher price than they bought it

Who would benefit the MOST from investing in a Roth IRA rather than another type of retirement account?

Someone who has a high income so they don't want have to pay tax on their current contributions

Someone who expects to earn significantly less when they are at retirement age, so they’ll be at a lower tax bracket in the future

Someone who is young and expects to earn more money later in life, so they’ll be at a higher tax bracket then

Someone who is at retirement age so they don’t have to worry about investing or paying taxes

What is one difference between actively managed mutual funds and index funds?

Actively managed mutual funds typically have higher fees than index funds do

Actively managed mutual funds guarantee the average return of the securities in the fund while index funds aim to beat the market

Actively managed mutual funds invest in less risky investments than index funds

Actively managed mutual funds track the performance of a single stock and bond while an index fund follows an index

If a person would like to avoid having their investment earnings taxed at the same rate as their marginal income tax, they should...

Wait at least 12 months to sell the investment

Apply for tax exemption

Diversify their investment portfolio

Become a professional fund manager

Which of the following is TRUE, based on the historic returns of the S&P 500?

The stock market fluctuates in the short term and is difficult to predict. It has an average annual return of 6-7%, adjusted for inflation.

The stock market fluctuates in the short term and the majority of investors can predict the direction of the market. The stock market has an average annual return that is negative, adjusted for inflation.

On average, the growth of the stock market matches the rate of inflation. It has an average annual return of 2-3%, adjusted for inflation.

Stock prices rise consistently in the short term and only decrease during recessions. The stock market has an average annual return of 15%, adjusted for inflation.

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

Social Security is a type of retirement savings plan offered by some employers

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

Social Security is a type of retirement savings plan that you can open through a brokerage firm

Social security is a government mandate that requires employers to offer their employees a 401(k) or pension plan

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 INCREASE because the interest will compound faster than the historical rate of inflation

His purchasing power will remain the SAME because the interest rate is the same as the historical rate of inflation

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

His purchasing power will INCREASE because the interest rate is higher than the historical rate of inflation

All of the following are advantages of saving for retirement in a 401(k), EXCEPT...

Your 401(k) contributions are tax-deductible

A 401(k) has a higher contribution limit than an IRA

Some employers will match contributions to your 401(k)

You can withdraw money at any time without paying a penalty

What is a bond?

A type of loan you can get from a bank that you pay back with interest

A type of loan you can get from the federal government that you pay back with interest

An investment in which you loan money to another individual and are paid back with interest

An investment in which you loan money to a corporation or government and are paid back with interest and the principal that you originally lent to them.

How are active investing and passive investing different?

Active investing requires you to make a minimum number of trades per day while passive investing does not

Active investing requires a hands-off approach while passive investing requires a hands-on approach

Active investing typically has lower fees while passive investing typically has higher fees

Active investing is typically done by a fund manager trying to beat the market while passive investing typically involves investing in a popular index like the S&P 500

A commonly used strategy to minimize investing risk is...

Hiring an investment manager who promises to provide the largest returns

Investing in only one company

Investing only when a stock's value is rising

Diversifying across asset classes and within each asset class

Which of the following is TRUE about investing?

It can help you grow your money through the power of compounding

It involves little risk because your returns are insured up to $250,000

It is meant for achieving short-term financial goals

It guarantees a high rate of return over a short period of time

Which of the following is TRUE about pension plans?

Pension plans are becoming increasingly common among employers in the U.S.

More nonunion workers have access to pension plans than union workers

How much an employee gets from a pension depends on how long they’ve worked for the employer and how much they earn

Employees generally control the investments within a pension plan

Tracie is new to investing and is going to use an app that offers trades with zero fees. After opening her account, Tracie should first...

Hire an investment manager

Conduct research on the investments she's interested in

Limit herself to one small investment so she can't lose as much

Invest a large sum of money

Which of the following explains why risk is not always bad when it comes to investing?

Insurance will cover your investing losses

Gains realized from higher-risk investments are untaxed

As risk increases, so does the possibility of greater returns

Robo-advisors eliminate all risk

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

Dollar-cost averaging is riskier than lump sum investing

Dollar-cost averaging involves consistently investing small amounts of money over long periods of time

Dollar-cost averaging is advantageous because earnings are untaxed

Dollar-cost averaging is offered only through robo-advisors

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 is insured by the federal government, so Sam's money is protected even if the fund performs poorly

A TDF buys a single stock and bond so that beginner investors can practice day trading

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

A TDF is actively managed by a fund manager but comes with low fees

All of the following are risks of investing in a single stock, EXCEPT...

If the company does not issue new stock, current stockholders could lose their entire investment

If the company’s profits decline, the stock price could decrease

If the company goes out of business, stockholders could lose their entire investment

If the overall stock market declines, the stock price could decrease

All of the following should be considered when creating your investing strategy EXCEPT...

The amount of capital you have available to invest

Your credit score

The amount of time your money will be invested before you start drawing from it

Your risk tolerance

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

A bond is issued by a company while bond funds only invest in government bonds

A bond guarantees you a higher rate of return than a bond fund

A bond pays you dividends while a bond fund pays you regular interest

Exchange traded funds...

have become less popular among investors

are considered to be high-risk investments

can be traded throughout the day

typically aim to beat the overall market's performance

Which of the following is an advantage of using a robo-advisor compared to hiring most financial advisors?

Lower returns

Lower fees

Higher returns

Higher fees

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

The interest rate for your bond will fall to 3%

The demand for your bond will decrease

The price of your bond will stay the same

Aleah is 19 and wants to get a head start on investing and opens a brokerage account. All of the following are benefits of doing so EXCEPT...

It gives her access to invest in securities like stocks, bonds, and mutual funds

There is no limit on the amount of money she can invest in securities

Any realized gains would be exempt from capital gains tax

It allows her to withdraw funds without penalty

Ben is 24 and wants to start saving for retirement. What can he do to set himself up for success?

Invest 10-15% of his monthly salary

Invest primarily in low-risk investments like bonds

Wait until his 30s to start investing

Delay his expected retirement age by 20 years

What are the two ways investors can earn money from a stock?

A fixed interest rate on the investment and decreasing the stock’s market cap

Dividends and selling the stock at a higher price than they bought it

Dividends and decreasing the stock’s market cap

A fixed interest rate on the investment and selling the stock at a higher price than they bought it

Who would benefit the MOST from investing in a Roth IRA rather than another type of retirement account?

Someone who has a high income so they don't want have to pay tax on their current contributions

Someone who expects to earn significantly less when they are at retirement age, so they’ll be at a lower tax bracket in the future

Someone who is young and expects to earn more money later in life, so they’ll be at a higher tax bracket then

Someone who is at retirement age so they don’t have to worry about investing or paying taxes

What is one difference between actively managed mutual funds and index funds?

Actively managed mutual funds typically have higher fees than index funds do

Actively managed mutual funds guarantee the average return of the securities in the fund while index funds aim to beat the market

Actively managed mutual funds invest in less risky investments than index funds

Actively managed mutual funds track the performance of a single stock and bond while an index fund follows an index

If a person would like to avoid having their investment earnings taxed at the same rate as their marginal income tax, they should...

Wait at least 12 months to sell the investment

Apply for tax exemption

Diversify their investment portfolio

Become a professional fund manager