Investment Strategy Test 1 — Questions and Answers
Question 1: You put $500 down to purchase stock on margin for $1,000. The stock's value decreases by 50%. You market it. How much of the $500 you initially invested are you ultimately left with?
- $1000
- $0 (Correct answer)
- $100
- $500
Correct answer: $0
When you purchase stock on margin, you borrow money from your broker. Your initial $500 investment was combined with a $500 loan to buy $1,000 worth of stock. When the stock's value decreases by 50%, it is now worth only $500. Upon selling the stock for $500, you must use that entire amount to repay the $500 margin loan, leaving you with none of your initial $500 investment.
Question 2: If Danita invests $6,000 at a basic yearly interest rate of 5%, her money will be worth more after five years.
- $1,500. (Correct answer)
- $3,000
- $1,200.
- $6,000
Correct answer: $1,500.
Simple interest is calculated only on the initial principal amount. Danita earns 5% of $6,000 each year, which is $300. Over five years, this annual interest accumulates to a total of $300 multiplied by 5, resulting in an additional $1,500 earned. Therefore, her money will be worth $1,500 more than her initial investment.
Question 3: Zach made a $300 stock market investment. His initial $300 increased to $330 after a year thanks to the stock market's 10 percent average annual return. In two years, his $300 had increased to $363. The following year, his initial investment had grown to $399. Zach increased his investment as a result of
- Opportunity cost
- Banking services
- Compounding (Correct answer)
- Globalization
Correct answer: Compounding
Compounding refers to the process where an investment earns returns not only on the initial principal but also on the accumulated returns from previous periods. Zach's investment grew because the 10% annual return each year was calculated on the new, larger balance, including previously earned profits. This 'interest on interest' effect allowed his money to grow at an accelerating rate.
Question 4: In general, bond prices will _____ if interest rates decrease.
- Decrease
- Increase (Correct answer)
- Have no impact
- None of the above
Correct answer: Increase
Bond prices and interest rates have an inverse relationship. When interest rates decrease, newly issued bonds will offer lower coupon payments. Consequently, existing bonds that were issued when rates were higher and offer more attractive, fixed coupon payments become more desirable to investors, which drives up their market price.
Question 5: Which definition of "selling short" is the best?
- Selling stocks before they have achieved their peak
- Selling stock shares at a loss
- Selling borrowed stock shares (Correct answer)
- Selling stock shares soon after purchasing them
Correct answer: Selling borrowed stock shares
Selling short is an investment strategy where an investor borrows shares of stock and immediately sells them on the open market. The goal is to buy the shares back later at a lower price, return them to the lender, and profit from the price difference. This strategy is employed when an investor anticipates a decline in the stock's value.
Question 6: What action should you take if a financial client reports a portfolio issue?
- Immediately apologize and find a solution to the issue. (Correct answer)
- Request that the manager call the client back.
- Fees for the client's subsequent five transactions are waived.
- Once the customer has calmed down, call the client again.
Correct answer: Immediately apologize and find a solution to the issue.
Immediately apologizing and finding a solution demonstrates professionalism, empathy, and a commitment to client satisfaction. This approach helps to de-escalate the situation, build trust, and shows the client that their concerns are taken seriously. Other options either delay resolution or do not directly address the client's immediate issue effectively.
Question 7: Deena is looking into potential investments. How can she determine the reliability of a source of information?
- See the publication date of the source
- Check the author's credentials (Correct answer)
- Search for any potential biases.
- Verify the citation of facts and figures.
Correct answer: Check the author's credentials
Checking the author's credentials is a primary way to determine the reliability of an information source. An author's expertise, education, professional experience, and affiliations directly indicate their authority and knowledge on a subject. Reputable credentials suggest that the information provided is likely accurate and well-informed.
Investment Strategy Test 1
You put $500 down to purchase stock on margin for $1,000.
The stock's value decreases by 50%.
You market it.
How much of the $500 you initially invested are you ultimately left with?