Investment Test 2 — Questions and Answers
Question 1: What does diversification primarily aim to reduce in an investment portfolio?
- Unsystematic risk (Correct answer)
- Inflation
- Transaction costs
- Capital gains tax
Correct answer: Unsystematic risk
Diversification spreads investments to reduce company-specific (unsystematic) risk.
Question 2: An investor buys a stock at $50 and sells at $65 after one year, receiving $2 in dividends. What is the total return?
- 30%
- 34% (Correct answer)
- 26%
- 15%
Correct answer: 34%
Total return = ($15 gain + $2 dividend) / $50 = 34%.
Question 3: Which type of investment account in the US allows tax-free qualified withdrawals in retirement?
- Traditional IRA
- Roth IRA (Correct answer)
- 401(k) traditional
- Brokerage account
Correct answer: Roth IRA
Roth IRA contributions are after-tax, so qualified withdrawals are tax-free.
Question 4: What is the term for the difference between a bond's purchase price and its face value when bought below par?
- Premium
- Coupon
- Discount (Correct answer)
- Yield
Correct answer: Discount
A bond bought below face value is bought at a discount.
Question 5: A mutual fund charges a fee deducted annually as a percentage of assets. What is this called?
- Load
- Expense ratio (Correct answer)
- Commission
- Spread
Correct answer: Expense ratio
The expense ratio is the annual fee as a percentage of fund assets.
Question 6: Which index tracks 500 large-cap US companies?
- Dow Jones Industrial Average
- Nasdaq Composite
- S&P 500 (Correct answer)
- Russell 2000
Correct answer: S&P 500
The S&P 500 tracks 500 large-cap US companies.
Question 7: What happens to existing bond prices when market interest rates rise?
- They rise
- They fall (Correct answer)
- They stay the same
- They double
Correct answer: They fall
Bond prices move inversely to interest rates, so rising rates lower prices.
Investment Test 2
What does diversification primarily aim to reduce in an investment portfolio?