Investment Principles of Investment 2

Question 1

What does diversification primarily aim to reduce in a portfolio?

Accepted Answer

Unsystematic risk

Answer

Diversification reduces unsystematic (company-specific) risk by spreading investments across assets.

Question 2

An investor with a 30-year horizon and high risk tolerance would most likely favor which asset class?

Accepted Answer

Equities

Answer

Equities offer higher long-term growth potential suitable for a long horizon and high risk tolerance.

Question 3

What is the relationship between bond prices and interest rates?

Accepted Answer

They move in opposite directions

Answer

Bond prices fall when interest rates rise and rise when rates fall, an inverse relationship.

Question 4

Which metric measures a stock's volatility relative to the overall market?

Accepted Answer

Beta

Answer

Beta measures a security's volatility relative to the broader market, where 1.0 equals market movement.

Question 5

What does dollar-cost averaging involve?

Accepted Answer

Investing fixed amounts at regular intervals

Answer

Dollar-cost averaging invests a fixed amount on a regular schedule regardless of price.

Investment Practice Test