Investment/Questions/Investment 1 Flashcards

What is the primary benefit of compound interest?

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.

Which of the following best describes dollar-cost averaging?

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.

What does the term 'beta' measure in relation to a stock?

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.

What is a mutual fund?

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.

Which term describes the strategy of investing in undervalued stocks trading below their intrinsic worth?

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.

What does 'market capitalization' refer to?

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.