Questions and Answers
Every investment carries some degree of risk.
True
If a company pays dividends on a stock, does that mean that the stock has appreciated in value? Why or why not?
No, the payment of dividends indicates that a company has earned profits.
Bonds are considered to offer a guaranteed return, but which is still a potential risk that investors face?
The issuer could go bankrupt.
What is one way in which bonds do not generate income for investors?
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Which statement best describes how an investor makes money off debt?
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Which best describes what a market index does?
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They both invest money to earn a profit.
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Which factors can affect a stock's price? (Select all that apply)
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Which can be traded in a commodities market?
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Once stocks are on the market, how are their prices set?
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Which statement is true of the relationship between risk and return?
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Why should investors know the difference between nominal and real interest rates?
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If the Federal Reserve decreased the money supply, what would the effects be? (Select all that apply)
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The nominal interest rate could best be described as the rate.
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Approximately how much of the initial investment's value would be lost after 15 years at 3% inflation?
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_________ policy involves government changes to spending or taxation to affect the economy.
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An investment with a stable and predictable history will most likely have?
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Interest rates generally reflect?
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Compared to high-risk investments, low- and medium-risk investments are in higher demand because they?
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If an investor has a $5,000 pretax return, the state tax rate is 4.5%, and the federal tax rate is 22.0%, what is the real investment value?
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How is a 401k different from an individual retirement account (IRA)?
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Which investment has the least liquidity?
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An investment with more liquidity would be ideal for someone who?
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Which investor is making a common error?
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Which statements are true regarding an individual retirement account? (Select all that apply)
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Which of these are considered both short- and long-term investments? (Select all that apply)
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Which investment advice would Gale most likely give to Alex?
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Which is the best way a couple can increase their income from investments for when they retire in twenty years?
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Study Notes
Investments and Risk
- Every investment carries some degree of risk, influencing potential returns and strategy.
- The payment of dividends signifies a company's profitability, but does not necessarily indicate stock appreciation.
Bonds and Returns
- Bonds offer returns that are legally guaranteed, but there's a risk of issuer bankruptcy.
- Income from bonds is generated through specified payments at maturity, not continuous cash flow.
Market Dynamics
- Market indices gauge overall performance of financial markets, serving as benchmarks for investment returns.
- Stock prices are influenced by the company’s financial health, overall market conditions, and economic factors.
Commodities and Trading
- Oil is a primary commodity traded in markets, highlighting the importance of natural resources in investing.
Risk-Return Relationship
- A fundamental principle: higher risks are associated with the potential for greater returns.
- Recognizing the difference between nominal and real interest rates is crucial for understanding inflation impact on investments.
Federal Reserve and Economic Indicators
- A decrease in the money supply typically results in increased interest rates, reduced borrowing, and lowered investment activities.
Taxation and Real Investment Value
- The nominal interest rate is simply the stated rate before adjusting for inflation and taxes.
- After accounting for a 4.5% state tax and 22% federal tax on a $5,000 return, the real investment value is $3,675.
Retirement Investment Options
- A 401(k), typically employer-sponsored, may offer matching contributions, distinguishing it from individual retirement accounts (IRAs).
- Among investments, a 401(k) generally has the least liquidity, making it less accessible for immediate cash needs.
Investment Strategies
- Investors should diversify their portfolios to mitigate risk, avoiding heavy investment in single stocks, regardless of the company's popularity.
- Contributions to IRAs have annual limits and can be tax-deductible, aiding in retirement savings.
Types of Investments
- Mutual funds, bonds, and commodities are classified as both short- and long-term investments, appealing to different investment strategies.
- Individuals planning for retirement should consider enrolling in a 401(k) and actively investing in the stock market for potential income growth.
Risk Tolerance and Retirement Planning
- Balancing risk-taking with retirement goals is essential; stepping outside comfort zones may be necessary for achieving financial objectives.
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Description
Test your knowledge on the principles of investment and risk management. This quiz covers topics including bonds, market dynamics, and the risk-return relationship, helping you understand how different factors influence financial decisions. Perfect for finance students and enthusiasts alike!
