Investment Starting Investment 3

Question 1

What does 'risk tolerance' refer to?

Accepted Answer

Your ability and willingness to endure losses

Answer

Risk tolerance describes how much volatility and potential loss you can comfortably handle.

Question 2

Which investment is generally considered the lowest risk?

Accepted Answer

U.S. Treasury bonds

Answer

U.S. Treasury bonds are backed by the federal government, making them among the safest investments.

Question 3

What is asset allocation?

Accepted Answer

Dividing investments among different asset classes

Answer

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?

Accepted Answer

100

Answer

Subtracting your age from 100 (or 110) gives a rough percentage to hold in stocks.

Question 5

What does diversification primarily reduce?

Accepted Answer

Unsystematic (company-specific) risk

Answer

Diversification reduces company-specific risk by not relying on any single investment.

Investment Practice Test