Answer: A. Buying assets for possible return. Investing means committing money to assets with the expectation of a return over time, while accepting risk.
Owning a share of common stock generally represents what?
A A loan to government
B Part ownership in a company
C A bank deposit
D An insurance claim
Answer: B. Part ownership in a company. Common stock generally represents an ownership interest in a company.
When an investor buys a bond, what is usually happening?
A Part ownership is transferred
B A deposit is insured
C Money is lent to issuer
D A dividend is guaranteed
Answer: C. Money is lent to issuer. A bond is generally a debt security through which an issuer borrows from investors.
How can an investment generate a return?
A Guaranteed monthly bonuses
B Only tax refunds
C Avoiding all market movement
D Price changes or income
Answer: D. Price changes or income. Returns may come from changes in value or income such as dividends or interest, depending on the asset.
Does owning stock guarantee dividend payments?
A No, dividends may change
B Yes, every quarter
C Only after a loss
D Yes, by law
Answer: A. No, dividends may change. Companies may pay dividends, but payments and amounts are not guaranteed.
Why do investment values fluctuate?
A All assets have fixed prices
B Markets and asset risks change
C Investors set identical values
D Returns are always scheduled
Answer: B. Markets and asset risks change. Prices can respond to company results, economic conditions, interest rates, and other risks.
Diversification refers to what practice?
A Buying only one popular asset
B Keeping every asset in cash
C Spreading investments across holdings
D Matching every investment exactly
Answer: C. Spreading investments across holdings. Diversification spreads investments across assets or exposures to reduce concentration risk, though it cannot eliminate losses.
Can diversification guarantee that a portfolio will not lose money?
A Yes, in every market
B Only with five assets
C Yes, when fees are low
D No, losses remain possible
Answer: D. No, losses remain possible. Diversification can reduce some risks but cannot guarantee gains or prevent all losses.
How does asset allocation describe a portfolio?
A Mix among asset categories
B Number of account passwords
C Timing of every trade
D Only the cash balance
Answer: A. Mix among asset categories. Asset allocation divides a portfolio among categories such as stocks, bonds, and cash.
Which personal factors can shape an asset allocation?
A Favorite brands and colors
B Goals, timeframe, and risk tolerance
C Brokerage office location
D Past month’s weather
Answer: B. Goals, timeframe, and risk tolerance. Goals, time horizon, and willingness and ability to bear losses can inform allocation decisions.
In investing, what does the time horizon measure?
A How often statements arrive
B Number of assets owned
C Expected time invested
D Time before an account opens
Answer: C. Expected time invested. A time horizon is the period an investor expects to invest toward a financial goal.
Why might a short-term goal call for lower volatility?
A Short goals always earn less
B Markets stop changing soon
C Cash guarantees every goal
D Less time to recover losses
Answer: D. Less time to recover losses. A short time horizon leaves less time to recover from market declines before funds are needed.
Risk tolerance includes which two dimensions?
A Ability and willingness to lose
B Income and tax filing
C Debt and account age
D Fees and trading volume
Answer: A. Ability and willingness to lose. Risk tolerance involves both financial capacity and emotional willingness to withstand potential losses.
What is liquidity in investing?
A Chance of guaranteed growth
B Ease of converting to cash
C Number of company owners
D Amount of annual tax
Answer: B. Ease of converting to cash. Liquidity describes how readily an investment can be sold or converted to cash, with limited delay or loss in value.
Why should investors understand an asset’s liquidity?
A It sets every dividend
B It removes market risk
C They may need funds quickly
D It guarantees a tax result
Answer: C. They may need funds quickly. An investor who needs money soon should understand access limits, sale timing, and potential costs.
How can compound growth build an investment balance?
A Principal is paid twice
B Fees create new shares
C Losses always reverse
D Returns can earn further returns
Answer: D. Returns can earn further returns. Compounding occurs when returns remain invested and can generate additional returns.
When sold above purchase cost, what may the gain be called?
A Increase realized on sale
B Interest charged on debt
C A regular account fee
D A deposit insurance payment
Answer: A. Increase realized on sale. A capital gain generally occurs when an asset is sold for more than its purchase cost, subject to tax rules.
If an asset sells below its purchase cost, what may result?
A A dividend guarantee
B A capital loss
C An insured deposit
D A fixed interest payment
Answer: B. A capital loss. Selling below the purchase cost may produce a capital loss, with tax treatment depending on local law.
Why should investors consider fees?
A They guarantee better performance
B They remove volatility
C They reduce net returns
D They increase principal
Answer: C. They reduce net returns. Investment fees reduce the amount of money remaining to earn returns over time.
Where can a fund’s ongoing operating expenses be disclosed?
A Company logo
B Market index chart
C Bank deposit receipt
D Prospectus fee table
Answer: D. Prospectus fee table. Fund prospectuses include standardized fee disclosures, including ongoing operating expenses.
What is an expense ratio for a fund?
A Annual operating costs as percentage
B One-time market price
C Guaranteed yearly return
D Investor’s total tax rate
Answer: A. Annual operating costs as percentage. A fund expense ratio expresses operating expenses as a percentage of fund assets, under the fund’s disclosures.
Does a lower expense ratio guarantee a better investment result?
A Yes, every year
B No, risk and performance vary
C Only for stock funds
D Yes, if index-linked
Answer: B. No, risk and performance vary. Lower fees can help net results, but performance and risks also depend on the fund’s holdings and market conditions.
What does an index fund generally seek to do?
A Guarantee index returns
B Avoid all investment risk
C Track a market index
D Pay identical dividends
Answer: C. Track a market index. An index fund seeks to track a benchmark; fees, trading costs, and tracking error can cause differences.
Can an index fund perfectly match its benchmark every day?
A Yes, always
B Only after fees
C Only during growth
D Not necessarily
Answer: D. Not necessarily. Tracking error, expenses, sampling, and trading can make fund performance differ from its index.
How is an actively managed fund typically run?
A Manager selects investments
B It guarantees benchmark returns
C It holds no securities
D Investors choose each trade
Answer: A. Manager selects investments. Active managers select holdings using the fund’s strategy; active management does not guarantee outperformance.
What is one common difference between mutual funds and ETFs?
A Mutual funds never pool assets
B ETF shares trade on exchanges
C ETFs guarantee market prices
D Mutual funds cannot hold bonds
Answer: B. ETF shares trade on exchanges. ETF shares generally trade on exchanges during the trading day, while mutual funds usually transact at a daily calculated NAV.
Can an ETF market price differ from its net asset value?
A No, prices always match
B Only when dividends pay
C Can trade away from NAV
D Only during market closure
Answer: C. Can trade away from NAV. ETF shares may trade at a premium or discount to net asset value.
What does a mutual fund’s NAV generally represent?
A Guaranteed redemption amount
B Total annual expense ratio
C Market index target
D Per-share value of fund assets
Answer: D. Per-share value of fund assets. Net asset value per share is based on fund assets minus liabilities, divided across shares.
Why read a fund’s prospectus before investing?
A Fund goals, risks, and fees
B It guarantees future gains
C It replaces account statements
D It sets the market price
Answer: A. Fund goals, risks, and fees. The prospectus describes a fund’s goals, strategies, risks, fees, and other important information.
Does past performance reliably predict future returns?
A It guarantees repeated results
B It cannot predict future returns
C It removes market risk
D It replaces a prospectus
Answer: B. It cannot predict future returns. Past performance can provide context but does not guarantee or reliably predict future results.
Unusually high or guaranteed returns should be treated how?
A Assume it is insured
B Send money quickly
C Treat it as a warning
D Ignore registration checks
Answer: C. Treat it as a warning. Promises of unusually high or guaranteed returns are common investment-fraud warning signs.
How can U.S. investors check certain investment professionals’ registration?
A Rely on online testimonials
B Ask an unknown caller
C Check a social profile
D Use official SEC lookup tools
Answer: D. Use official SEC lookup tools. U.S. investors can use Investor.gov resources to check registration and background for certain professionals.
Why might concentrating all savings in one company be risky?
A One issuer dominates exposure
B Diversification becomes guaranteed
C Interest is paid daily
D Company losses are insured
Answer: A. One issuer dominates exposure. Concentration can magnify the effect of one company’s problems on the portfolio.
What does rebalancing generally do?
A Guarantees a higher return
B Restores a chosen allocation
C Eliminates transaction costs
D Cancels all market risk
Answer: B. Restores a chosen allocation. Rebalancing brings a portfolio closer to a chosen allocation; trading may create costs or tax consequences.
Rebalancing generally restores what allocation?
A Allocation stays unchanged
B Cash earns no interest
C Trades may trigger fees
D Markets close permanently
Answer: C. Trades may trigger fees. Rebalancing can involve transaction costs and taxable events, depending on the account and jurisdiction.
How does regular investing help manage contribution timing?
A It guarantees a low price
B It eliminates losses
C It predicts market bottoms
D It spreads purchases over time
Answer: D. It spreads purchases over time. Regular investing spreads contributions over time, but it does not guarantee a profit or prevent loss.
What risk remains with dollar-cost averaging?
A Investment prices can still fall
B Purchase prices stay fixed
C Fees disappear automatically
D Returns become guaranteed
Answer: A. Investment prices can still fall. Prices can fall after purchases, and the strategy does not remove market or investment risk.
Are mutual funds and ETFs generally government-insured like deposits?
A Yes, up to any amount
B No, investment losses are possible
C Only index funds are insured
D Yes, when bought at banks
Answer: B. No, investment losses are possible. Mutual funds and ETFs are investments, not FDIC-insured deposits, and investors can lose money.
Which statement best describes investment risk?
A A guaranteed annual fee
B A fixed interest payment
C Possible loss of invested money
D A government tax credit
Answer: C. Possible loss of invested money. Investment risk includes the possibility of losing some or all of the money invested.
Why might a bond fund lose value?
A Bond funds cannot fluctuate
B Every issuer pays early
C Funds guarantee principal
D Holdings and market prices change
Answer: D. Holdings and market prices change. Bond funds can lose value as their holdings, credit conditions, and market prices change.
How can rising market interest rates affect existing bond prices?
A Prices may fall
B Prices always double
C Coupons disappear immediately
D Issuers repay every bond
Answer: A. Prices may fall. Existing bond prices may fall when market interest rates rise, though the relationship and size depend on the bonds and market.
What is credit risk for a bond investor?
A Fund charges an expense ratio
B Issuer may not repay
C Investor forgets a password
D Market closes early
Answer: B. Issuer may not repay. Credit risk is the possibility that a bond issuer fails to make promised payments.
Why should short-term money not be exposed casually to high volatility?
A Short-term goals never matter
B Prices are fixed monthly
C Markets may fall before use
D Volatility guarantees higher return
Answer: C. Markets may fall before use. If money is needed soon, a decline may leave little time to recover before withdrawal.
What can investment return calculations overlook?
A Account title
B Number of statements
C Investor’s mailing address
D Taxes and fees
Answer: D. Taxes and fees. Taxes and fees can change an investor’s net outcome, and their treatment depends on product and jurisdiction.
Which investment principle helps align a portfolio with a goal?
A Match risk to time horizon
B Select last year’s winner
C Ignore future cash needs
D Use one asset always
Answer: A. Match risk to time horizon. A portfolio’s risk should be considered alongside when the money is needed and the investor’s goals.
What is a market index?
A A direct investment account
B Measure of a securities basket
C A guaranteed loan rate
D A fund’s expense ratio
Answer: B. Measure of a securities basket. A market index measures the performance of a defined group or basket of securities.
Can investors buy an index itself directly?
A Yes, as a deposit
B Only through a credit card
C No, funds track indexes
D Yes, without securities
Answer: C. No, funds track indexes. An index is a measurement; a fund may provide investment exposure by tracking it.
Why review an investment portfolio periodically?
A Returns become guaranteed later
B Fees vanish automatically
C Markets stop fluctuating
D Goals and circumstances can change
Answer: D. Goals and circumstances can change. Periodic review can assess whether holdings, risk, fees, and allocation still fit current goals.
Across a long-term plan, why review a portfolio periodically?
A Define goals and timeframe
B Choose the highest advertised return
C Borrow the maximum amount
D Follow an unsolicited tip
Answer: A. Define goals and timeframe. Understanding goals, timeframe, and risk capacity can guide research before selecting investments.
A brokerage account commonly serves what role?
A Insure every market loss
B Access securities through broker
C Set a company’s dividend
D Guarantee a fund’s return
Answer: B. Access securities through broker. A brokerage account lets investors hold or transact in securities through a broker, subject to account terms and rules.