Investment Test 2

Question 1

What does diversification primarily aim to reduce in an investment portfolio?

Accepted Answer

Unsystematic risk

Answer

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?

Accepted Answer

34%

Answer

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?

Accepted Answer

Roth IRA

Answer

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?

Accepted Answer

Discount

Answer

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?

Accepted Answer

Expense ratio

Answer

The expense ratio is the annual fee as a percentage of fund assets.

Investment Practice Test