Investment Strategy Test 1

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?

Accepted Answer

$0

Answer

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.

Accepted Answer

$1,500.

Answer

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

Accepted Answer

Compounding

Answer

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.

Accepted Answer

Increase

Answer

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?

Accepted Answer

Selling borrowed stock shares

Answer

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.

Investment Practice Test

Investment Practice Test

Investment Strategy Test 1