Investment Investment MCQ 3 — Questions and Answers
Question 1: A diversified portfolio is best described as one that:
- Holds only one asset class
- Spreads investments across varied assets (Correct answer)
- Concentrates in a single stock
- Avoids stocks entirely
Correct answer: Spreads investments across varied assets
Diversification spreads investments across different assets to reduce overall risk.
Question 2: Which account offers tax-free qualified withdrawals in retirement?
- Traditional IRA
- Roth IRA (Correct answer)
- Taxable brokerage
- 401(k) pre-tax
Correct answer: Roth IRA
Roth IRA contributions are made after-tax, so qualified withdrawals in retirement are tax-free.
Question 3: Compound interest differs from simple interest because it:
- Ignores time
- Earns interest on interest (Correct answer)
- Is always lower
- Applies only to bonds
Correct answer: Earns interest on interest
Compound interest earns returns on both the principal and previously accumulated interest.
Question 4: An index fund aims to:
- Beat the market actively
- Match a market index's performance (Correct answer)
- Invest only in bonds
- Avoid all stocks
Correct answer: Match a market index's performance
Index funds passively track and replicate the performance of a market index.
Question 5: What is liquidity in investing?
- The amount of debt held
- How easily an asset converts to cash (Correct answer)
- The dividend yield
- The tax rate applied
Correct answer: How easily an asset converts to cash
Liquidity measures how quickly and easily an asset can be converted to cash without losing value.
Question 6: A blue-chip stock is typically:
- A small startup
- A large, established, financially sound company (Correct answer)
- A penny stock
- A government bond
Correct answer: A large, established, financially sound company
Blue-chip stocks are shares of large, well-established, financially stable companies.
Question 7: Asset allocation primarily refers to:
- Choosing a single stock
- Dividing investments among asset categories (Correct answer)
- Timing daily trades
- Avoiding taxes
Correct answer: Dividing investments among asset categories
Asset allocation is the strategy of dividing a portfolio among stocks, bonds, and other categories.
Investment Investment MCQ 3
A diversified portfolio is best described as one that: