Investment (Investor's Knowledge) 3 — Questions and Answers
Question 1: An ETF differs from a mutual fund primarily because it:
- Trades on exchanges throughout the day (Correct answer)
- Is always actively managed
- Cannot hold stocks
- Has no expense ratio
Correct answer: Trades on exchanges throughout the day
ETFs trade intraday on exchanges like stocks, whereas mutual funds price once per day.
Question 2: A bond's price typically moves in which direction when interest rates rise?
- Down (Correct answer)
- Up
- Stays flat
- Doubles
Correct answer: Down
Bond prices fall when interest rates rise because existing bonds become less attractive.
Question 3: What is an investor's 'risk tolerance'?
- Their willingness and ability to endure losses (Correct answer)
- The maximum legal investment limit
- A broker's commission rate
- The tax rate on gains
Correct answer: Their willingness and ability to endure losses
Risk tolerance is how much volatility and potential loss an investor can comfortably accept.
Question 4: Which is a characteristic of a blue-chip stock?
- Large, established, financially sound company (Correct answer)
- Newly listed startup
- Penny stock under $1
- Unregistered private security
Correct answer: Large, established, financially sound company
Blue-chip stocks are shares of large, reputable, financially stable companies.
Question 5: Asset allocation refers to:
- Dividing a portfolio among asset classes (Correct answer)
- Picking a single best stock
- Timing the market daily
- Avoiding all bonds
Correct answer: Dividing a portfolio among asset classes
Asset allocation is how an investor distributes funds across stocks, bonds, cash, and other classes.
Question 6: A dividend is:
- A share of profits paid to shareholders (Correct answer)
- A loan from the company
- A type of capital gain
- A brokerage fee
Correct answer: A share of profits paid to shareholders
Dividends are distributions of a company's earnings paid to its shareholders.
Question 7: Liquidity describes how easily an asset can be:
- Converted to cash without major loss (Correct answer)
- Insured against theft
- Inherited tax-free
- Leveraged with margin
Correct answer: Converted to cash without major loss
Liquidity measures how quickly an asset can be sold for cash near its market value.
Investment (Investor's Knowledge) 3
An ETF differs from a mutual fund primarily because it: