Investing Basics Questions and Answers

Diversification reduces reliance on a single investment outcome.

1. Spreading money across different investments
2. Buying one stock only
3. Timing the market perfectly
4. Avoiding all risk

Risk tolerance shapes portfolio choices.

1. Ability and willingness to handle losses
2. Guaranteed return requirement
3. Monthly rent level
4. Tax filing status only

Common stock gives partial ownership and variable returns.

1. Ownership share in a company
2. A bank deposit guarantee
3. A fixed government loan only
4. A credit card reward

Bond buyers lend money and expect interest and principal repayment.

1. A debt security issued by borrower
2. A company ownership share only
3. A checking account
4. A mortgage escrow

Index funds usually seek broad market exposure at low cost.

1. Track a market index
2. Pick only one winning stock
3. Guarantee no losses
4. Avoid diversification

Volatility measures price fluctuation risk.

1. Prices move up and down
2. Dividends are illegal
3. Banks close daily
4. Taxes disappear

Money needed soon generally should take less market risk.

1. Longer horizons may handle more volatility
2. It changes bank routing numbers
3. It guarantees returns
4. It removes inflation

Investment outcomes can change with markets and conditions.

1. Not a guarantee of future results
2. A promise of future profit
3. A tax deduction
4. A savings account rate

Diversification reduces some risks but not all market risk.

1. Market-wide risk remains
2. All risk disappears
3. Stocks cannot fall
4. Bonds always rise

A drop from 100 to 80 requires 20 gain on 80, which is 25 percent.

1. 25 percent
2. 20 percent
3. 10 percent
4. 40 percent

Fund costs compound against the investor.

1. It reduces investor returns over time
2. It guarantees performance
3. It removes volatility
4. It increases dividends by law

Regular investments buy more shares when prices are lower and fewer when higher.

1. Investing fixed amounts at intervals
2. Borrowing to buy one stock
3. Selling only during crashes
4. Avoiding all risk

Allocation is the broad mix of stocks, bonds, cash, and other assets.

1. Dividing money among asset classes
2. Choosing only one ticker
3. Opening a checking account
4. Filing taxes

Concentration can increase company or sector risk.

1. Higher exposure to a small number of holdings
2. Perfect diversification
3. No volatility
4. Guaranteed income

Less liquid investments can be hard or costly to exit quickly.

1. You may need to sell or access money
2. It sets tax brackets
3. It guarantees returns
4. It removes fees

Short horizons have less time to recover from losses.

1. Capital preservation and liquidity
2. Maximum volatility
3. Long lock-up risk
4. Speculative leverage

Longer periods can make market volatility more tolerable.

1. There may be more time to recover from volatility
2. Losses are impossible
3. Fees disappear
4. Inflation stops

Rebalancing controls risk relative to the planned allocation.

1. Selling some winners or buying lagging assets to restore targets
2. Buying only the winners forever
3. Ignoring allocation
4. Closing all accounts

Dividends are company distributions, not guaranteed bond coupons.

1. Cash or stock distribution from a company to shareholders
2. Loan principal
3. Bank routing code
4. Insurance premium

Investors require compensation for bearing risky asset exposure.

1. Expected extra return for taking market risk over risk-free assets
2. Bank account password
3. Credit card fee
4. Mortgage escrow shortage

Market timing depends on predicting near-term price moves.

1. Trying to enter and exit based on short-term predictions
2. Maintaining target allocation
3. Diversifying globally
4. Automating contributions

Tax treatment differs by account type and jurisdiction.

1. Investment income and gains may be taxable without retirement-account shelter
2. They always avoid taxes
3. They never hold ETFs
4. They guarantee losses

Index funds can provide simple diversified exposure.

1. Broad diversification at low cost
2. Guaranteed outperformance
3. No market risk
4. No need to understand fees

Cash can be safe nominally but weak in real terms.

1. Purchasing power may decline over time
2. Cash balance must fall daily
3. Bank accounts become stocks
4. Credit score doubles

Time horizon should guide risk level.

1. When will this money be needed?
2. Which ticker is trending today?
3. What color is the app?
4. How many ads did I see?