Investment Investment/Questions/Investment 1 — Questions and Answers
Question 1: What is the primary benefit of compound interest?
- Interest is paid only on the original principal
- Earnings generate additional earnings over time (Correct answer)
- Interest rates are guaranteed to remain fixed
- Taxes on gains are deferred indefinitely
Correct answer: Earnings generate additional earnings over time
Compound interest means you earn returns not just on your original investment, but also on previously accumulated interest, causing wealth to grow exponentially over time.
Question 2: Which of the following best describes dollar-cost averaging?
- Buying a stock only when its price is at its lowest point
- Investing a fixed dollar amount at regular intervals regardless of price (Correct answer)
- Splitting an investment equally among different asset classes
- Selling investments when they reach a predetermined price target
Correct answer: Investing a fixed dollar amount at regular intervals regardless of price
Dollar-cost averaging involves investing a set amount on a regular schedule, which means you automatically buy more shares when prices are low and fewer when prices are high, reducing the impact of volatility.
Question 3: What does the term 'beta' measure in relation to a stock?
- The stock's dividend yield compared to the market
- The ratio of a company's debt to its equity
- A stock's price volatility relative to the overall market (Correct answer)
- The percentage of earnings paid out as dividends
Correct answer: A stock's price volatility relative to the overall market
Beta measures how much a stock's price tends to move relative to the broader market. A beta above 1 means the stock is more volatile than the market; below 1 means it is less volatile.
Question 4: What is a mutual fund?
- A government-issued bond with a fixed interest rate
- A pooled investment vehicle managed by a professional that holds a diversified portfolio (Correct answer)
- A type of savings account insured by the FDIC
- A direct loan made by investors to a corporation
Correct answer: A pooled investment vehicle managed by a professional that holds a diversified portfolio
A mutual fund pools money from many investors and uses it to buy a diversified portfolio of stocks, bonds, or other securities, managed by a professional fund manager.
Question 5: Which term describes the strategy of investing in undervalued stocks trading below their intrinsic worth?
- Growth investing
- Index investing
- Value investing (Correct answer)
- Momentum investing
Correct answer: Value investing
Value investing involves identifying stocks that appear underpriced relative to their fundamentals — such as earnings, book value, or cash flow — with the expectation that the market will eventually recognize their true worth.
Question 6: What does 'market capitalization' refer to?
- The total annual revenue generated by a company
- The total value of a company's outstanding shares of stock (Correct answer)
- The maximum price at which a stock can be traded
- The amount of debt a company carries on its balance sheet
Correct answer: The total value of a company's outstanding shares of stock
Market capitalization is calculated by multiplying a company's current share price by its total number of outstanding shares, giving an estimate of the company's total market value.
Investment Investment/Questions/Investment 1
What is the primary benefit of compound interest?