Deck 11: Investment Basics

Question 1

The major types of risk are:

A) Inflation and taxation
B) Credit and bankruptcy
C) Default,interest rate,market,and liquidity
D) None of the options are correct

Answer 1

Default,interest rate,market,and liquidity

Question 2

_________________ is a form of compensation for the investor who takes on the risk of the investment.

A) Risk premium
B) Interest
C) Coupon payment
D) All options are correct

Answer 2

All options are correct

Question 3

What is the impact on a checking account's purchasing power if it is earning 2% APY and inflation is 3% for the past year?

A) Savings outpaced inflation by 1%
B) Interest outpaced inflation by 1%
C) Inflation outpaced savings by 1%
D) The impact cannot be determined without knowing the balance

Answer 3

Inflation outpaced savings by 1%

Question 4

_________________ is the risk that the value of your investment will decrease due to changes in the market.

A) Default risk
B) Interest rate risk
C) Market risk
D) Liquidity risk

Question 5

The first question to ask when deciding whether to save or invest is:

A) How much money do I have in an emergency fund?
B) When will I need the money?
C) Is the money insured?
D) Can I get at least 10% return on this money?

Question 6

The value of a dollar is _________________.

A) Driven by the stock market
B) Controlled by Congress
C) Controlled by the U.S.Treasury
D) Inversely related to inflation

Question 7

A household with an annual take-home pay of $120,000 a year needs how much in its emergency fund?

A) $1,200
B) $6,000
C) $10,000
D) $12,000

Question 8

_________________ is an outlay of money for a profit,where the risk exists that either some or the entire original amount may be lost.

A) An investment
B) Savings
C) Discipline
D) Risk premium

Question 9

_________________ is the risk you take when you lock into a fixed-rate investment for a specific length of time.

A) Default risk
B) Interest rate risk
C) Market risk
D) Liquidity risk

Question 10

_________________ is the risk of not being able to cash out an investment quickly enough to either meet cash flow needs or to prevent a loss.

A) Default risk
B) Interest rate risk
C) Market risk
D) Liquidity risk

Question 11

_________________ is money set aside for future use in a secure,no-risk instrument.

A) An investment
B) Savings
C) Discipline
D) Allocation

Question 12

You are trying to decide how and when to take your next cruise.You could invest $200 a month for four years in a money market that is earning 4% or you could go now,taking out a loan for $10,000 at 11% and paying it off over the next four years.If inflation runs at 2% for the next four years,what is the true difference in cost between the two options?

A) $400
B) $800
C) $1,205.16
D) $2,420.06

Question 13

Inflation is:

A) Always bad for the economy
B) Helpful to an incumbent seeking reelection
C) The increase of prices for goods and services over time
D) A necessity to strengthen the dollar

Question 14

Money needed in the next 10 years should be put into a _________________.

A) Savings account
B) Short-term certificate of deposit
C) U.S.Treasury bill
D) All options are correct

Question 15

Which of the following would be considered an appropriate savings vehicle for an emergency fund?

A) Savings account
B) Certificate of deposit
C) Blue chip stocks
D) Rare jewels

Question 16

Ten years ago,your grandparents gifted you a 20-year,$1,000 bond.The interest rate at the time of purchase was 5%.Today,comparable bonds are paying 7%.Approximately how much could you sell this bond for?

A) $714
B) $800
C) $918
D) $1,200

Question 17

Which instrument does not have a zero default risk?

A) Federal Deposit Insurance Corporation (FDIC)account
B) National Credit Union Association (NCUA)account
C) Mutual fund account
D) U.S.Treasury bills

Question 18

_________________ is the risk that the company you have invested in may declare bankruptcy.

A) Default risk
B) Interest rate risk
C) Market risk
D) Liquidity risk

Question 19

The value of a dollar is _________________.

A) Driven by the stock market
B) Its purchasing power
C) Controlled by the U.S.Treasury
D) Inversely related to inflation

Question 20

Where should Elena put her graduation gift money of $5,000 if she plans to use it to help fund a European trip in four years?

A) In a short-term,safe,insured,guaranteed investment
B) In an index mutual fund
C) In gold or other precious metals
D) Under her mattress

Question 21

If you have a high-risk tolerance and you want to invest money for the long term,you might invest in _________________.

A) Certificates of deposit
B) Fixed-income mutual funds and high-grade corporate bonds
C) Balanced mutual funds
D) Precious metals

Question 22

_________________ is a strong secure base with appropriately proportioned building blocks to help maintain growth.

A) A market growth plan
B) Diversification
C) The investment pyramid
D) Budgeting

Question 23

_________________ is the spreading of assets among different investment options to reduce risk.

A) Laddering
B) Diversification
C) Portfolio
D) Savings

Question 24

You determine that the appropriate balance for your investment-risk tolerance is a 70-20-10 proportion (stocks,bonds,and cash).After the first year,your $10,000 investment has doubled in value to $20,000,with $16,000 in stocks,$2,750 in bonds,and $1,250 in cash.How should your assets be allocated to retain your risk proportions?

A) Sell $2,000 in stocks,buy $1,250 in bonds,and add $750 in cash
B) Sell $1,000 in stocks,buy $2,250 in bonds,and add $750 in cash
C) Buy $1,000 in stock,sell $2,250 in bonds,and reduce cash by $750
D) Buy $2,000 in stock,sell $1,250 in bonds,and reduce cash by $750

Question 25

Right after college graduation,you open a targeted retirement account,allocating 90% of the funds in domestic and international stocks and 10% in corporate bonds.You plan to shift these allocations to 50% stock and 50% bonds upon retirement.You are now ready for retirement with $8,000,000 in your fund.How much money should you allocate to stocks and bonds?

A) $7,000,000 to stocks and $1,000,to bonds
B) $4,000,000 to stocks and $4,000,000 to bonds
C) $1,000,000 to stocks and $7,000,000 to bonds
D) You cannot answer this question without knowing the current inflation rate

Question 26

If you are managing your own portfolio,you need to re-evaluate your investment goals,risk tolerance,portfolio returns,and asset allocation on at least _________________ basis.

A) A monthly
B) An every-other-month
C) An every-6-months
D) An annual

Question 27

Which investment vehicle is not part of Tier II,the 'medium-risk,medium-return' zone?

A) Quality growth stocks,blue-chip stocks
B) Money market accounts
C) Mutual funds,aggressive growth funds
D) Real estate

Question 28

At Ava's second birthday,her grandparents wanted to pool their money to buy U.S.Treasury bonds that would ultimately provide $120,000 for college expenses in 16 years.If calculating a gain of 4% interest,what dollar amount in U.S.Treasury bonds will they need to buy on Ava's second birthday?

A) $32,035
B) $64,069
C) $92,103
D) $120,000

Question 29

_________________ reduces risk by allocating investments proportionally to the investment pyramid.

A) Diversification
B) The lottery
C) Time management of money
D) Budgeting

Question 30

To entice investors to take on riskier investments,the investment must pay a _________________ to offset the risk.

A) Investment premium
B) Investment incentive
C) Personal guarantee
D) Risk premium

Question 31

Risk tolerance for savings and investing _________________.

A) Is the same for every individual
B) Is dependent on the individual
C) Is not important when deciding on an investment strategy
D) Should decrease with inflation

Question 32

In the investment pyramid,your base is _________________.

A) A 'cover your assets' zone
B) A 'penny a day' savings zone
C) A 'no-risk,known-return' savings zone
D) An investment base

Question 33

Which investment vehicle is not part of Tier I,the 'low-risk,low-return' zone?

A) Certificates of deposit
B) Money market accounts
C) Fixed-income mutual funds
D) High-grade corporate bonds

Question 34

What percentage of your investments should be part of Tier III,the 'high-risk,high-return' zone?

A) 5%
B) 10%
C) 20%
D) Whatever percent of money you can lose without fear of bankruptcy

Question 35

The investment pyramid _________________.

A) Was created in Egypt
B) Is not reflective of the risk of investments
C) Is only for people with incomes over $100,000 annually
D) Is a guideline for investing and saving

Question 36

_________________ is the diversification of the portfolio.

A) Asset allocation
B) Laddering
C) Portfolio
D) Savings

Question 37

Over the past 75 years,inflation has grown on average _________________ /year,money in the bank has averaged a _________________ return,and the stock market has averaged _________________.

A) 1.1%; 3.3%; 3.3%
B) 3.1%; 3.9%; 12.3%
C) 12.3%; 3.9%; 3.1%
D) 12.3%; 12.3%; 12.3%

Question 38

To maintain a secure amount but still grow your money,_________________ your investments across different risk options.

A) Minimize
B) Diversify
C) Stratify
D) Ladder

Question 39

_________________ is all the investments you hold.

A) An asset allocation account
B) Diversification
C) A Portfolio
D) Your savings

Question 40

What proportion of your income should be in savings?

A) 2-3 months of income
B) 6-9 months of income
C) 12 months of income
D) 10%

Question 41

The higher the risk,the higher the potential return and the less likely you will achieve the higher return.

Question 42

Important savings goals during the independent life stage are investing in your education and investing in your retirement.

Question 43

With a 529 college savings account,there are no taxes on the account's earnings; anyone (your mom,dad,grandparents,uncles,aunts,etc.)can contribute to the account; and,in some state-sponsored plans,the contribution is deductible from state taxes.

Question 44

Investing is putting money at risk.

Question 45

If your tax liability is 30% of your $50,000 salary and you contribute $2,000 to your 401(k)and your employer matches $2,000,what is your immediate ROI upon your decision to contribute $2,000 to your 401(k)?

A) 30%
B) 60%
C) 130%
D) 286%

Question 46

Which instrument is not typical for persons in the independent financial life stage?

A) Direct deposit into savings account
B) 529 college savings plan
C) Quality stock
D) Roth IRA

Question 47

The _________________ stage is the life stage in which typically you are in the prime earning years and you have more disposable income than ever before.This makes it a good time to contribute the maximum amount to your retirement accounts,which will help lower your taxable income and help you reach financial independence sooner.

A) Independent
B) Young family
C) Empty nest
D) Retirement

Question 48

Describe the four major types of investment risks.

Question 49

How much money should you have in your savings before you venture into investments and why?

Question 50

A traditional IRA does not offer any tax advantage on the contribution,but it grows tax-free and all withdrawals are tax-free.

Question 51

In which life stage is it the best time to invest in a Roth IRA and start building your retirement fund?

A) Independent
B) Young family
C) Empty nest
D) Retirement

Question 52

A Coverdell Education Savings Account is similar to a Roth IRA in that the contributions to the accounts are after-tax and they grow free of federal income tax.

Question 53

Which is not one of the advantages of 529 college savings plans?

A) You pay no taxes on the account's earnings
B) Anyone (your mom,dad,grandparents,uncles,aunts,etc.)can contribute to the account and,in some state-sponsored plans,the contribution is deductible from state taxes
C) Even if you are currently in college,you can contribute to a 529 plan and the earnings won't be taxed if they are used for qualified educational expenses
D) Balances left over after completing your education can be rolled over into a Roth IRA

Question 54

A reason not to invest in a mutual fund is that you have a targeted retirement date and you would like to reduce your market risks gradually as you approach retirement.

Question 55

Saving your money in a low-risk account grows its purchasing power.

Question 56

When allocations are made to each tier of the investment pyramid proportionally,you mitigate overall risks while continuing to grow wealth.

Question 57

Explain the relationship between investment risk and potential return on investment.

Question 58

How does an investment differ from savings?

Question 59

If your tax liability is 30% of your $50,000 salary and you contribute $2,000 to your 401(k)and your employer matches $2,000,how much free money are you getting by taking full advantage of the employer match?

A) $2,000
B) $4,000
C) 30%
D) None

Question 60

All 401(k)contributions are on a pretax basis and the earnings are tax-deferred.

Question 61

Why is the lowest tier of the investment pyramid not an investment?

Question 62

How does an investor maintain a balanced portfolio?

Question 63

Why is it recommended that investors work to balance a portfolio?

Question 64

Explain why it is recommended that investors should diversify their assets across investments.