Investment Fundamentals Quiz

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Questions and Answers

What percentage range do dividends typically fall within for most stocks?

3% to 5%

5% to 7%

0% to 1%

1% to 3% (correct)

Firms that pay low dividends tend to be characterized as which of the following?

Older and financially stable

Younger with high growth potential (correct)

Overvalued and risky

Underperforming and declining

Which type of stock represents companies that are undervalued by the market?

Growth stocks

Income stocks

Blue-chip stocks

Value stocks (correct)

What is the primary means through which bonds offer returns to investors?

Coupon payments Signup and view all the answers

What does the Holding Period Return (HPR) refer to?

Total return on an investment during a specific time period Signup and view all the answers

Which kind of stocks provides periodic income through large dividends?

Income stocks Signup and view all the answers

What is the key difference between capital gains and interest income concerning taxes?

Capital gains usually incur a lower tax burden. Signup and view all the answers

What type of investment generates income through rent payments?

Real Estate Signup and view all the answers

What is one primary benefit of portfolio diversification?

It reduces the impact of poorly performing investments. Signup and view all the answers

Which type of investment is prioritized for ensuring adequate liquidity?

Money market securities Signup and view all the answers

What defines the secondary market?

A marketplace for selling existing securities. Signup and view all the answers

What do individual investors typically seek from their investments in stocks?

High returns with the potential for growth. Signup and view all the answers

What is the role of a portfolio manager?

To make investment decisions on behalf of clients. Signup and view all the answers

Which of the following investment types is considered high risk?

Stocks Signup and view all the answers

What occurs during an Initial Public Offering (IPO)?

Firms sell shares to the public for the first time. Signup and view all the answers

How can shareholders earn returns besides dividends?

By selling their stocks at a higher price. Signup and view all the answers

What is generally true about the relationship between risk and risk premium?

Higher risk correlates with a higher risk premium. Signup and view all the answers

What is a disadvantage of term deposits?

Low returns compared to other investments. Signup and view all the answers

Why is asset allocation considered important in a portfolio?

It can influence over 90% of a portfolio's return. Signup and view all the answers

Which of the following best describes diversification?

Reducing risk by spreading investments across different assets. Signup and view all the answers

How does negative correlation among investments affect a portfolio?

It offers substantial diversification benefits. Signup and view all the answers

What is an important factor in determining the volatility of a portfolio?

The correlation of returns of individual investments. Signup and view all the answers

Which investment type is typically associated with lower risk and stable returns over the long term?

GICs or mutual funds including GICs. Signup and view all the answers

What is insider trading characterized by?

Seeking information that is not available to the public. Signup and view all the answers

What benefit does diversifying investments across different industries provide?

Reduces exposure to one specific industry Signup and view all the answers

Why might investors include bonds in their portfolios?

Bonds help reduce overall risk in a portfolio Signup and view all the answers

What does constant weighting asset allocation entail?

Rebalancing the portfolio to original asset allocation Signup and view all the answers

Which strategy involves adjusting asset allocation based on long-term market conditions?

Strategic asset allocation Signup and view all the answers

What is a primary characteristic of tactical asset allocation?

Adjustments are based on short-term market forecasts Signup and view all the answers

For investors early in their lives, which type of securities is generally recommended?

Safe and liquid securities for easy access to funds Signup and view all the answers

What is a limitation of diversifying investments across different countries?

It can expose investors to conditions affecting entire industries Signup and view all the answers

Why might a single asset allocation formula not be suitable for all investors?

Personal characteristics and investment goals vary among individuals Signup and view all the answers

What is one primary characteristic of hedge funds?

Pooled investment Signup and view all the answers

What is a requirement for an individual to be considered an accredited investor?

Possessing financial assets of $1 million or more Signup and view all the answers

What feature of Target Date Funds makes them suitable for retirement saving?

Their asset allocation mix becomes more conservative as the target date approaches Signup and view all the answers

Which of the following is a disadvantage of using robo advisors?

Cannot choose equity classes Signup and view all the answers

Which statement about Dollar Cost Averaging is correct?

It requires consistent investments over time regardless of the market conditions. Signup and view all the answers

What type of investments can you make using a self-directed brokerage account?

Mutual funds and ETFs Signup and view all the answers

What is a disadvantage commonly associated with hedge funds?

They often fail and have low average lifespans. Signup and view all the answers

Which option best describes the nature of commodities?

They include both agricultural and resource products. Signup and view all the answers

Which account should you consider using first if you are in the lowest tax bracket?

TFSA Signup and view all the answers

What is a potential benefit of buying ETFs in the USA in USD?

Greater variety of ETFs available Signup and view all the answers

Which scenario leads to more money spent on RRSP tax savings?

Having a lower retirement income than current income Signup and view all the answers

Which of the following accounts can avoid income tax on dividends if held within an RRSP?

Investments on US stock exchanges Signup and view all the answers

To be in the top 1% of income earners globally, what annual after-tax income is required?

$60,000 USD Signup and view all the answers

What investment strategy is suggested during market dips?

Buy more into the market Signup and view all the answers

Why are women statistically considered better investors?

They exhibit greater patience Signup and view all the answers

What is the suggested rule of thumb for short-term investing?

Keep any money needed in the next 5 years in a high-interest savings account Signup and view all the answers

What happens to the price of a stock when there is an increase in demand?

The price goes up. Signup and view all the answers

Which of the following statements accurately describes what investing in stocks means?

You have a claim on a portion of the company's assets and earnings. Signup and view all the answers

What is a public company?

A company whose stock is listed and sold on public markets. Signup and view all the answers

How do dividends benefit shareholders?

They provide a share of the company's profits. Signup and view all the answers

What primarily influences the fluctuation of a company's stock price?

Supply and demand for the stock. Signup and view all the answers

Investors aim to make money by purchasing stocks primarily through which of the following methods?

Selling the stock for a profit or receiving dividends. Signup and view all the answers

What is the essence of a company's value in relation to stock price?

It is supposed to represent the present value of future cash flows. Signup and view all the answers

What does it mean when a company buys back its stocks from the market?

It reduces the number of shares outstanding. Signup and view all the answers

What is the expected long-term rate of return from a broad-based real estate investment?

9% to 11% Signup and view all the answers

What is one of the recommended rules for rebalancing an investment portfolio?

Rebalance using new money rather than selling assets Signup and view all the answers

Which characteristic is essential for mutual funds regarding their investment purpose?

They have a stated investment purpose that limits their investments. Signup and view all the answers

Why might an investor prefer a no-load mutual fund?

They help save money by eliminating load fees. Signup and view all the answers

What does the net asset value (NAV) of a mutual fund unit represent?

The fair market value of all investments divided by the units outstanding. Signup and view all the answers

What is a primary reason to avoid investment advisors who sell high MER mutual funds?

High MER fees reduce overall investment performance over time. Signup and view all the answers

In what way do rebalancing strategies benefit an investment portfolio?

They help maintain the desired asset allocation and reduce risk. Signup and view all the answers

What is a common misconception about mutual funds that charge a load?

They always outperform no-load funds. Signup and view all the answers

What type of fund is generally preferred for adding large baskets of stocks to a portfolio?

Index funds Signup and view all the answers

What is a significant disadvantage of investing in individual stocks?

It can be uncertain when to buy or sell Signup and view all the answers

Why is it advised not to invest more than 25% of your portfolio in a single stock?

To enhance diversification and reduce risk Signup and view all the answers

Which investing strategy has a higher success rate, lump sum or dollar cost averaging?

Lump sum is better 70% of the time Signup and view all the answers

Which broker type is preferable for investing small amounts regularly?

One that charges no commissions Signup and view all the answers

What does 'Norbert’s Gambit' refer to in investing?

A way to convert between currencies using stocks Signup and view all the answers

What determines the choice of a fund with higher fees?

If it can outperform the market by more than its fee Signup and view all the answers

Which statement best reflects the philosophy of passive investing?

To invest across all stocks in an index Signup and view all the answers

What is one reason why mutual funds are considered less tax efficient than ETFs?

They generate capital gains due to high turnover. Signup and view all the answers

Which feature distinguishes ETFs from mutual funds in terms of trading?

ETFs allow intra-day trading like stocks. Signup and view all the answers

What aspect of ETF investment typically leads to greater tax efficiency compared to mutual funds?

Lower turnover rates in holdings. Signup and view all the answers

What is a characteristic of mutual funds that can contribute to additional costs for investors?

Mutual funds often charge loads or management fees. Signup and view all the answers

Which statement is true regarding the structure of both ETFs and mutual funds?

Both pool investor money to invest in a diversified portfolio. Signup and view all the answers

Why might an investor prefer ETFs over mutual funds?

ETFs offer flexibility to buy and sell at any time during trading hours. Signup and view all the answers

What is a disadvantage of mutual funds that could potentially affect investor returns?

Mutual funds incur annual tax burdens on investors. Signup and view all the answers

How do mutual funds handle investor redemptions differently from ETFs?

Mutual funds require selling underlying securities to meet redemption requests. Signup and view all the answers

What should individuals in the highest tax bracket typically prioritize using for retirement savings?

RRSP first, then TFSA Signup and view all the answers

What is a significant benefit of using RRSP contributions wisely?

Opportunity to grow wealth through investment Signup and view all the answers

What is a common advantage of investing in ETFs listed in the USA compared to Canada?

Lower fees for comparable ETFs Signup and view all the answers

What should individuals consider when opting for RRSP contributions?

Maximized tax refund potential Signup and view all the answers

Which scenario describes a disadvantage of investing in US ETFs?

Risk of currency exchange fees Signup and view all the answers

Why might someone choose to use a TFSA in retirement planning?

No mandatory withdrawals required Signup and view all the answers

How can individuals manage risk when investing in ETFs across borders?

By understanding return differences between US and Canadian ETFs Signup and view all the answers

What is a key consideration when deciding whether to use RRSP or TFSA contributions?

The immediacy of tax deductions Signup and view all the answers

What withdrawal rate is generally advised to maintain wealth for heirs while retiring?

4% Signup and view all the answers

Which factor is crucial in determining how much to invest monthly for retirement?

Average annual compound rate of return Signup and view all the answers

What is the primary risk associated with choosing a higher withdrawal rate during retirement?

Running out of money Signup and view all the answers

How many years must a 19-year-old save if they plan to retire at 65?

46 years Signup and view all the answers

What strategy is recommended for adjusting retirement plans as you gain new information?

Review your plan annually Signup and view all the answers

What is a conservative approach when estimating spending for retirement planning?

Ignore potential income sources like OAS Signup and view all the answers

What is the suggested annual return rate to plan for retirement safety?

6% - 12% Signup and view all the answers

Which statement best describes the importance of balancing withdrawal rates and legacy goals?

Enjoyment of retirement years should be weighed against legacy desires. Signup and view all the answers

Study Notes

Portfolio Diversification

Diversification is a safer investment strategy than focusing on individual stocks.
Diversification mitigates risk by balancing out poor-performing investments with strong performers.

Types of Investments

Money Market Securities: These are low-risk investments like savings accounts, money market funds, and GICs. They provide liquidity but lower returns.
Stocks: Represent partial ownership in a company.
- Primary Market: Where newly issued securities are traded.
- Secondary Market: Existing securities are traded between investors.
- IPO (Initial Public Offering): A company's first offering of shares to the public.
- Institutional Investors: Professionals managing large investment pools (e.g., pension funds).
- Individual Investors: Individuals investing a portion of their income in stocks.
- Portfolio Managers: Financial professionals who make investment decisions.
- Day Traders: Investors who buy and sell stocks within the same day.
- Stock Price Appreciation: Investors gain when stocks increase in value.
- Dividends: Regular payments to shareholders by companies, potentially increasing the overall return of a portfolio.
Bonds: Long-term debt securities issued by governments or corporations, that provide a fixed income stream.
Mutual Funds: Pooled investment funds managed by professionals. They offer diversification and professional management.
Real Estate: Includes real estate investments and trusts.

Investment Return

Return From Investing In Stocks: Measured by dividend income and stock price appreciation.
Value Stocks: Represent stocks undervalued by the market. These can still be profitable.
Growth Stocks: Represent potential for very high returns from younger firms.
Asset Allocation: Dividing investment assets across various types of investments.

Risk of Investing

Unsystematic Risk: Risk specific to a company, industry, or country.
Systematic Risk: Risk affecting all companies, industries, and countries. This is usually harder to predict and diversify against than unsystematic risk.
Risk-Free Rate: Rate of return for an investment with no risk - typically government bonds.
Risk Premium: Extra return for taking on investment risk.

Asset Allocation

Asset Allocation: Dividing investment assets across various types of investments.
Term Deposits: Fixed returns from short-term investments, providing liquidity with lower returns.
Strategic Asset Allocation: Adjusts investment portfolio allocation based on anticipated shifts in conditions.
Tactical Asset Allocation: Adjusts investment portfolio with short-term perspectives.

Investing Fundamentals

Dividend Reinvestment Plan (DRIP): Automatically reinvesting dividends in the same company.
Bonds: Investors who earn interest payments on their investment, potentially providing income through the fixed interest rate.
Mutual Funds: Pooled investment funds offering diversification and professional management.
Exchange-Traded Funds (ETFs): Securities that mirror specific market indexes and are often cheaper and more tax-efficient than Mutual Funds with lower management fees.
Active Investing: Investors actively seeking to outperform the market by making quick decisions, which can be risky.
Passive Investing: Investors holding investments for a longer period and following market indexes.
Brokerage Accounts: Accounts for buying and selling investments, often with varying fee structures (commissions).

Additional Notes

Professional Managers: are unlikely to consistently better the market.
Lump Sum vs. Dollar Cost Averaging (DCA): Lump sum is putting all savings at once while DCA is spreading investments regularly.
Cryptocurrency: Digital, decentralized currencies, with high volatility.
Target Date Funds (TDF): Investment designed for long-term goals, typically retirement, offering diversification and automatic rebalancing.
Robo-Advisors: Automated investment services based on algorithms, often with low fees and high convenience.
Risk Tolerance: A measure evaluating how much risk one is willing to take, crucial for creating a tailored investment strategy.

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Description

Test your knowledge on key concepts in investments, including dividends, stocks, bonds, and portfolio management. Discover the differences between various investment types and measure your understanding of market strategies. Perfect for finance students and aspiring investors!