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Investment/Questions/Test 1 Flashcards

6 cards from real Investment practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. What is the primary purpose of an expense ratio in a mutual fund?

    Answer: It represents the annual fee charged to investors as a percentage of assets

    The expense ratio is the annual cost of owning a mutual fund, expressed as a percentage of the fund's average assets. It covers management fees, administrative costs, and other operating expenses, directly reducing investor returns.

  2. Which metric measures a stock's price relative to its earnings per share?

    Answer: Price-to-earnings (P/E) ratio

    The price-to-earnings (P/E) ratio divides the current stock price by its earnings per share (EPS). It is one of the most widely used valuation metrics, indicating how much investors are willing to pay for each dollar of earnings.

  3. An investor purchases a bond with a face value of $1,000, a 5% coupon rate, and a 10-year maturity. How much annual interest will the investor receive?

    Answer: $50

    The annual coupon payment equals the face value multiplied by the coupon rate: $1,000 × 5% = $50. This payment is fixed and paid regardless of changes in the bond's market price.

  4. What does a beta of 1.5 indicate about a stock compared to the overall market?

    Answer: The stock is 50% more volatile than the market

    Beta measures a security's volatility relative to the market. A beta of 1.5 means the stock is expected to move 1.5 times as much as the market — if the market rises 10%, the stock is expected to rise 15%, and vice versa.

  5. Which investment strategy involves regularly investing a fixed dollar amount regardless of asset price?

    Answer: Dollar-cost averaging

    Dollar-cost averaging (DCA) involves investing a consistent fixed amount at regular intervals. This strategy automatically buys more shares when prices are low and fewer when prices are high, reducing the impact of short-term volatility.

  6. What is the risk-free rate most commonly used as a benchmark in investment analysis?

    Answer: The yield on short-term US Treasury bills

    Short-term US Treasury bills (T-bills) are considered virtually risk-free because they are backed by the full faith and credit of the US government. Their yield is used as the baseline risk-free rate in models like the Capital Asset Pricing Model (CAPM).