Free Investment (Investor's Knowledge) Questions and Answers 1

Question 1

What is the definition of "false diversification"?

Accepted Answer

Owning a lot of investment that all move up and down together

Answer

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.

Question 2

What exactly does it mean to be diversified?

Accepted Answer

Owning investment that react differently to market or economic events

Answer

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.

Question 3

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

Accepted Answer

ETFs trade through the trading day while mutual funds trade once per day

Answer

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.

Question 4

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

Accepted Answer

An ownership stake in the mutual fund company

Answer

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.

Question 5

What is the difference between a Roth and a conventional?

Accepted Answer

Roth contributions are after-tax, while traditional retirement contribution are pre-tax

Answer

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.

Investment Practice Test

Investment Practice Test

Free Investment (Investor's Knowledge) Questions and Answers 1