NAB Investment Basics 3 — Questions and Answers
Question 1: What does 'capital gain' refer to in investing?
- Regular income received from dividends
- The profit made when an asset is sold for more than its purchase price (Correct answer)
- Interest earned on a savings account
- The initial deposit made to open an investment account
Correct answer: The profit made when an asset is sold for more than its purchase price
A capital gain is the positive difference between an asset's selling price and its original purchase price.
Question 2: What is 'dollar-cost averaging' as an investment strategy?
- Converting all investments to US dollars to avoid currency risk
- Investing a fixed dollar amount at regular intervals regardless of market price (Correct answer)
- Buying only when the market reaches a specific price target
- Selling investments gradually to lock in profits over time
Correct answer: Investing a fixed dollar amount at regular intervals regardless of market price
Dollar-cost averaging means investing a consistent amount regularly, buying more units when prices are low and fewer when prices are high.
Question 3: In investing, what is a 'dividend'?
- A fee charged by fund managers for managing your portfolio
- A portion of a company's profits distributed to shareholders (Correct answer)
- The difference between an asset's purchase and sale price
- A type of bond issued by a corporation
Correct answer: A portion of a company's profits distributed to shareholders
A dividend is a payment made by a company to its shareholders, usually from profits, as a reward for holding the company's stock.
Question 4: What is 'inflation risk' in an investment context?
- The risk that an investment platform will go bankrupt
- The risk that returns will not keep pace with rising prices, eroding purchasing power (Correct answer)
- The risk of losing money due to currency fluctuations
- The risk of a company failing to pay its dividends
Correct answer: The risk that returns will not keep pace with rising prices, eroding purchasing power
Inflation risk is the danger that your investment returns grow more slowly than inflation, meaning your money buys less over time.
Question 5: What does 'asset allocation' mean in portfolio management?
- The process of selecting individual stocks within a sector
- Deciding what proportion of a portfolio to invest in each asset class (Correct answer)
- Transferring assets between brokers to minimize fees
- Calculating the tax due on investment gains
Correct answer: Deciding what proportion of a portfolio to invest in each asset class
Asset allocation is the strategy of dividing a portfolio among different asset categories — such as stocks, bonds, and cash — to balance risk and reward.
Question 6: Which of the following best describes a 'bond'?
- An ownership stake in a publicly listed company
- A loan made by an investor to a government or corporation in exchange for fixed interest payments (Correct answer)
- A guaranteed savings product offered by a bank
- A contract giving the right to buy shares at a set price
Correct answer: A loan made by an investor to a government or corporation in exchange for fixed interest payments
A bond is a fixed-income security where the investor lends money to the issuer, who repays the principal at maturity plus periodic interest payments.
Question 7: What does 'rebalancing' a portfolio mean?
- Selling all investments and starting fresh with a new strategy
- Adjusting the proportion of assets in a portfolio to restore the original target allocation (Correct answer)
- Moving all funds into the best-performing asset class
- Transferring a portfolio from one financial institution to another
Correct answer: Adjusting the proportion of assets in a portfolio to restore the original target allocation
Rebalancing means periodically buying or selling assets to maintain the desired asset allocation as market movements cause proportions to drift.
NAB Investment Basics 3
What does 'capital gain' refer to in investing?