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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?

Risk and return always move in the same direction Signup and view all the answers

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

Age Signup and view all the answers

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

Cryptocurrency Signup and view all the answers

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

Investing in assets with negative correlation Signup and view all the answers

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

Saving is liquid and safe, while investing is less liquid and higher risk Signup and view all the answers

What is risk tolerance?

The level of risk you are comfortable with Signup and view all the answers

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

Investing has the possibility of negative financial outcomes, while saving is safe Signup and view all the answers