Investment (Investor's Knowledge) 2 — Questions and Answers
Question 1: What does diversification primarily aim to reduce in an investment portfolio?
- Unsystematic (company-specific) risk (Correct answer)
- Inflation risk
- Interest rate risk
- Tax liability
Correct answer: Unsystematic (company-specific) risk
Diversification spreads holdings across assets to reduce risk specific to any single company or sector.
Question 2: An investor's 'time horizon' refers to:
- How long until the money is needed (Correct answer)
- The market's trading hours
- The age of a stock listing
- The duration of a bond's coupon
Correct answer: How long until the money is needed
Time horizon is the expected length of time before an investor needs to access their invested funds.
Question 3: Which account allows tax-free qualified withdrawals in retirement in the US?
- Roth IRA (Correct answer)
- Traditional 401(k)
- Brokerage account
- Money market account
Correct answer: Roth IRA
Roth IRA contributions are made after tax, so qualified withdrawals in retirement are tax-free.
Question 4: A P/E ratio measures a stock's price relative to its:
- Earnings per share (Correct answer)
- Dividend yield
- Book value
- Trading volume
Correct answer: Earnings per share
The price-to-earnings ratio compares the share price to the company's earnings per share.
Question 5: Dollar-cost averaging involves:
- Investing a fixed amount at regular intervals (Correct answer)
- Buying only when prices fall
- Selling losers and holding winners
- Timing market peaks and troughs
Correct answer: Investing a fixed amount at regular intervals
Dollar-cost averaging means investing equal amounts on a set schedule regardless of price.
Question 6: Which investment generally carries the LOWEST risk?
- US Treasury bills (Correct answer)
- Small-cap growth stocks
- High-yield junk bonds
- Cryptocurrency
Correct answer: US Treasury bills
Treasury bills are backed by the US government and considered nearly risk-free.
Question 7: Compound interest is best described as earning interest on:
- Both principal and accumulated interest (Correct answer)
- Only the original principal
- Only reinvested dividends
- The market index average
Correct answer: Both principal and accumulated interest
Compound interest grows by earning returns on prior interest as well as the principal.
Investment (Investor's Knowledge) 2
What does diversification primarily aim to reduce in an investment portfolio?