Saving vs Investing

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Questions and Answers

Which one of the following correctly defines the market risk premium?

  • The market risk premium is the risk-free return divided by the market return rate.
  • The market risk premium is the expected market return minus the risk-free rate. (correct)
  • The market risk premium is the market return rate divided by the risk-free rate.
  • The market risk premium is the risk-free return minus the expected market return.

Which one of the following accurately describes asset allocation?

  • Asset allocation refers to the process of managing risk through a combination of stocks, bonds, and cash. (correct)
  • Asset allocation refers to the process of dividing investments between stocks and bonds.
  • Asset allocation refers to the process of diversifying investments within a portfolio.
  • Asset allocation refers to the process of determining the level of investment in stocks based on age.

If the risk-free rate is 4% and the expected rate of return on an investment is 8%, what is the market risk premium?

  • $4\%$
  • $8\%$
  • $16\%$
  • $12\%$ (correct)

Which of the following best describes the relationship between risk and return in investing?

<p>Risk and return always move in the same direction (D)</p> Signup and view all the answers

What is the primary factor that determines an individual's risk tolerance when investing?

<p>Age (D)</p> Signup and view all the answers

Which of the following is NOT a common asset class in investing?

<p>Cryptocurrency (B)</p> Signup and view all the answers

What is the best strategy for long-term investing in terms of risk management?

<p>Investing in assets with negative correlation (A)</p> Signup and view all the answers

Which of the following best describes the difference between saving and investing?

<p>Saving is liquid and safe, while investing is less liquid and higher risk (D)</p> Signup and view all the answers

What is risk tolerance?

<p>The level of risk you are comfortable with (A)</p> Signup and view all the answers

Why is investing considered to be higher risk compared to saving?

<p>Investing has the possibility of negative financial outcomes, while saving is safe (C)</p> Signup and view all the answers

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