Investment Test 1

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What is the definition of "false diversification"?

Correct! Wrong!

Explanation:
You aren't genuinely diversified if you own 20 different stocks, all of which are in the IT business. If the tech industry suffers a setback, your entire portfolio will be wiped out.

What exactly does it mean to be diverssified?

Correct! Wrong!

Explanation:
Diversification is the process of dividing your money over a variety of investments that will perform differently in the same situation. Bonds, for example, usually rise when stock prices fall. You can lessen the volatility of your portfolio by holding both stocks and bonds.

A key difference between ETFs and mutual funds is which of the following?

Correct! Wrong!

Explanation:
ETFs, like stocks, can be purchased and traded at any time during the day. This means that an ETF's price will fluctuate from time to time. A mutual fund, on the other hand, is only priced once a day, at the end of the trading day. Active or passive management is available for both ETFs and manual funds.

What do you get when you buy a mutual fund share?

Correct! Wrong!

Explanation:
You own a share of a mutual fund that invests in Apple and Google; you don't actually own Apple and Google (unless you buy them yourself elsewhere). Unfortunately, you'll have to pay for your own ice cream cone as well. If you're investing, on the other hand, you've earned it.

What is the difference between a Roth and a conventional?

Correct! Wrong!

Explanation:
You won't be able to deduct money deposited into a Roth today, but you will be able to withdraw it tax-free later. This implies that your Roth earnings are never taxed (as long as you follow the IRS's withdrawal criteria). Traditional and Roth IRAs and 401(k)s are both available.

What exactly is a basis point?

Correct! Wrong!

Explanation:
A basis point is a unit of measurement for interest rate adjustments. One basis point equals 0.01 percent (0.0001), therefore if rates jumped 50 basis points, that means they rose 0.5 percent

What is a mutual fund's sales load?

Correct! Wrong!

Explanation:
A commission paid to the broker who sells you a mutual fund is known as a "sales load." On top of the expense ratio, the sales load is deducted from your investment dollars, which is why investors should look for no-load mutual funds.

If bonds and interest rates were on a playground together, they'd be on the:

Correct! Wrong!

Explanation:
When interest rates rise, bond prices often decline, much like a seesaw (and vice versa). This is due to the fact that investors aren't as eager to pay as much for old bonds with lower interest rates as they are for new bonds with greater interest rates.

What does "shorting" a stock imply?

Correct! Wrong!

Explanation:
Shorting a stock, often known as short selling, is the act of selling borrowed stock. Short sellers do this in the hopes that the stock price will fall, allowing them to purchase it at a reduced price later. If the price rises, the seller is liable for purchasing at the new price, effectively doubling the risk of loss.

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