Investment Starting Investment 3 — Questions and Answers
Question 1: What does 'risk tolerance' refer to?
- The maximum you can legally invest
- Your ability and willingness to endure losses (Correct answer)
- The fee a broker charges
- How fast a stock trades
Correct answer: Your ability and willingness to endure losses
Risk tolerance describes how much volatility and potential loss you can comfortably handle.
Question 2: Which investment is generally considered the lowest risk?
- Penny stocks
- U.S. Treasury bonds (Correct answer)
- Cryptocurrency
- Options contracts
Correct answer: U.S. Treasury bonds
U.S. Treasury bonds are backed by the federal government, making them among the safest investments.
Question 3: What is asset allocation?
- Picking one winning stock
- Dividing investments among different asset classes (Correct answer)
- Selling all assets at once
- Borrowing to buy assets
Correct answer: Dividing investments among different asset classes
Asset allocation spreads money across stocks, bonds, and cash to balance risk and return.
Question 4: A common rule of thumb for stock allocation by age is to subtract your age from what number?
- 50
- 100 (Correct answer)
- 200
- 25
Correct answer: 100
Subtracting your age from 100 (or 110) gives a rough percentage to hold in stocks.
Question 5: What does diversification primarily reduce?
- Total returns
- Unsystematic (company-specific) risk (Correct answer)
- Tax obligations
- Trading fees
Correct answer: Unsystematic (company-specific) risk
Diversification reduces company-specific risk by not relying on any single investment.
Question 6: Why might a young investor hold more stocks than bonds?
- Stocks never lose value
- They have a long horizon to recover from downturns (Correct answer)
- Bonds are illegal for young people
- Stocks have no risk
Correct answer: They have a long horizon to recover from downturns
A long time horizon lets younger investors ride out market dips and benefit from higher stock growth.
Question 7: What is rebalancing a portfolio?
- Cashing out entirely
- Adjusting holdings back to target allocation (Correct answer)
- Buying only the best performer
- Switching brokers
Correct answer: Adjusting holdings back to target allocation
Rebalancing restores your intended asset mix after market movements shift the proportions.
Investment Starting Investment 3
What does 'risk tolerance' refer to?