Investment Basics: A Comprehensive Guide for Beginners

Question 1

To create a well-diversified investment portfolio, which strategy is most effective?

Accepted Answer

Spread investments across different types of assets, like stocks, bonds, and real estate.

Answer

Invest mostly in one type of asset, like stocks.

Answer

Only invest in low-risk assets, like government bonds.

Answer

Avoid diversification and invest only in stocks that are expected to grow quickly.

Question 2

In investing, what is the relationship between risk and return?

Accepted Answer

Higher potential returns are linked to higher risk.

Answer

All investments have the same risk and return.

Answer

Return is not affected by risk.

Answer

Risk-averse investors should only invest in low-risk options.

Question 3

What is a primary difference between mutual funds and exchange-traded funds (ETFs)?

Accepted Answer

ETFs can be traded throughout the trading day, while mutual funds can only be traded once per day.

Answer

Mutual funds offer greater liquidity than ETFs.

Answer

ETFs are only passively managed, while mutual funds can be actively or passively managed.

Answer

Mutual funds have lower fees than ETFs.

Question 4

Which bond type is issued by a private organization, like a company, and typically has more risk than government bonds?

Accepted Answer

Corporate bond

Answer

Treasury bond

Answer

Municipal bond

Answer

Savings bond

Question 5

Which of the following is NOT a feature of stocks?

Accepted Answer

Offer a fixed rate of return

Answer

Represent ownership in a company

Answer

Can pay dividends

Answer

Potential for capital appreciation

Question 6

Which type of investment is generally considered less risky than stocks?

Accepted Answer

Bonds

Answer

Mutual funds

Answer

ETFs

Answer

Commodities

Question 7

What is a mutual fund?

Accepted Answer

A collection of stocks, bonds, or other assets managed by a professional

Answer

A single company's stock

Answer

A government-issued bond

Answer

A tradable security that tracks a specific market index

Question 8

What is the primary purpose of diversifying an investment portfolio?

Accepted Answer

Reduce overall investment risk

Answer

Maximize returns

Answer

Avoid capital losses

Answer

Increase volatility

Question 9

What is compound interest?

Accepted Answer

Interest earned on both the principal and previously earned interest

Answer

Interest earned only on the principal amount

Answer

Interest that remains constant over time

Answer

Interest that fluctuates based on market conditions

Question 10

What does the term "yield" refer to in the context of bonds?

Accepted Answer

Current interest rate paid on the bond

Answer

Total return on the bond over its lifetime

Answer

Value of the bond at maturity

Answer

Potential capital gains

Question 11

What is asset allocation and how does it help manage investment risk? Discuss the key factors to consider when creating an effective asset allocation strategy.

Accepted Answer

Asset allocation involves diversifying investments across asset classes like stocks, bonds, and cash to reduce risk and enhance long-term returns.

Answer

Asset allocation focuses on investing only in high-risk assets to maximize returns.

Answer

Asset allocation is a passive strategy where investments are held indefinitely, regardless of market conditions.

Question 12

Which of the following is NOT a key characteristic of stocks?

Accepted Answer

Are guaranteed to increase in value

Answer

Represent ownership in a company

Answer

Have the potential for high returns

Answer

Can provide dividends

Question 13

What is the primary purpose of a prospectus in the investment context?

Accepted Answer

To provide detailed information about an investment opportunity

Answer

To guarantee a positive return on investment

Answer

To simplify the investment process

Answer

To eliminate all investment risks

Question 14

What is the main goal of diversification in investment portfolios?

Accepted Answer

Reduce overall investment risk

Answer

Increase potential returns

Answer

Eliminate market volatility

Answer

Protect against inflation

Question 15

How does a stock split differ from a stock dividend?

Accepted Answer

Stock splits increase the number of shares while stock dividends pay out cash

Answer

Stock dividends increase the number of shares while stock splits pay out cash

Answer

Stock dividends pay out additional shares while stock splits pay out cash

Answer

Both stock splits and stock dividends dilute the value of existing shares

Question 16

Which type of investment fund is actively managed by a fund manager?

Accepted Answer

Mutual fund

Answer

Index fund

Answer

Exchange-traded fund (ETF)

Answer

Closed-end fund

Question 17

Which of the following is a key characteristic of stocks?

Accepted Answer

Potential for substantial growth

Answer

Fixed returns

Answer

Low risk

Answer

Guaranteed principal

Question 18

What is the primary function of a bond?

Accepted Answer

To lend money to a company or government

Answer

To represent ownership in a company

Answer

To track the performance of a market index

Answer

To invest in a diversified basket of stocks

Question 19

Which type of investment vehicle provides diversification benefits?

Accepted Answer

Mutual fund

Answer

Stock

Answer

Bond

Answer

Certificate of deposit

Question 20

What is the primary role of a financial advisor in personal finance?

Accepted Answer

To provide personalized financial guidance

Answer

To manage investments

Answer

To sell insurance products

Answer

To offer tax advice

Question 21

What is the difference between a bull market and a bear market?

Accepted Answer

Bull markets are characterized by rising prices, while bear markets by falling prices

Answer

Bull markets are typically shorter than bear markets

Answer

Bull markets are associated with high risk, while bear markets with low risk

Answer

There is no difference between bull and bear markets

Question 22

What is the purpose of diversifying a portfolio?

Accepted Answer

To reduce investment risk

Answer

To increase guaranteed returns

Answer

To simplify investment management

Answer

To avoid financial losses

Question 23

Which of the following investment options is generally considered the least risky?

Accepted Answer

Cash

Answer

Stocks

Answer

Bonds

Answer

Mutual funds

Question 24

Which of the following is NOT a type of investment vehicle discussed in this unit on Investment Basics?

Accepted Answer

Certificates of Deposit (CDs)

Answer

Stocks

Answer

Bonds

Answer

Mutual funds

Question 25

When investing in stocks, what represents ownership in a company?

Accepted Answer

Share

Answer

Bond

Answer

Mutual fund

Answer

Exchange-traded fund

Question 26

Which type of investment typically provides a fixed income stream over a defined period?

Accepted Answer

Bond

Answer

Stock

Answer

Mutual fund

Answer

Exchange-traded fund

Question 27

Which type of investment vehicle is traded on a stock exchange and tracks an index or sector?

Accepted Answer

Exchange-traded fund

Answer

Stock

Answer

Bond

Answer

Mutual fund

Question 28

What is a fiduciary responsibility?

Accepted Answer

A legal obligation to act in the best interest of another party

Answer

A type of investment account

Answer

A government agency that regulates investments

Answer

A financial advisor who charges a flat fee

Question 29

Which investment strategy gives the holder the option, but not the requirement, to buy or sell an asset at a set price on a future date?

Accepted Answer

Options

Answer

Futures

Answer

Stocks

Answer

Bonds

Question 30

Which type of investment account offers tax benefits specifically for retirement savings?

Accepted Answer

401(k) Plan

Answer

Brokerage Account

Answer

Money Market Account

Answer

Education Savings Account (ESA)

Question 31

How do clear investment goals improve investment decision-making?

Accepted Answer

Provide guidance and focus for decisions.

Answer

Guarantee higher returns with lower risk.

Answer

Apply only to long-term investments.

Answer

Should never be changed once set.

Question 32

Which of the following is NOT considered a basic investment vehicle?

Accepted Answer

Home loan

Answer

Mutual fund

Answer

Stock

Answer

Bond

Question 33

What is a key characteristic of stocks?

Accepted Answer

They represent ownership in a company

Answer

They are guaranteed to appreciate in value

Answer

They typically offer fixed returns

Answer

They are issued by the government

Question 34

Which of the following is an example of a fixed-income investment?

Accepted Answer

Bond

Answer

Mutual fund

Answer

Stock

Answer

ETF

Question 35

What is a primary advantage of investing in mutual funds?

Accepted Answer

Diversification

Answer

Low risk

Answer

Guaranteed high returns

Answer

Tax-free earnings

Question 36

What is the main distinction between an open-end and a closed-end mutual fund?

Accepted Answer

Open-end funds can be bought and sold at the current net asset value (NAV) at any time, while closed-end funds trade on an exchange like stocks and may trade at a premium or discount to their NAV.

Answer

Closed-end funds offer more diversification than open-end funds.

Answer

Open-end funds have higher fees than closed-end funds.

Question 37

What is a potential risk associated with investing in exchange-traded funds (ETFs)?

Accepted Answer

Tracking error

Answer

Lack of diversification

Answer

Low liquidity

Answer

High fees

Question 38

What is the primary purpose of a prospectus?

Accepted Answer

To provide potential investors with comprehensive information about a security, including its risks and potential returns, before they make an investment decision.

Answer

To guarantee the profitability of an investment

Answer

To provide tax advice to investors

Question 39

What is the primary difference between a bull market and a bear market?

Accepted Answer

In a bull market, overall stock prices tend to rise over a sustained period, while in a bear market, they tend to fall over a sustained period.

Answer

Bear markets are always preceded by bull markets, and vice versa.

Answer

Bull markets are characterized by high volatility, while bear markets are characterized by low volatility.

Question 40

Which of the following is generally recommended as a suitable investment strategy for beginners?

Accepted Answer

Dollar-cost averaging

Answer

Venture capital investing

Answer

Day trading

Answer

Options trading

Question 41

Which of the following is **not** a key characteristic of stocks?

Accepted Answer

Guaranteed income

Answer

Potential for growth

Answer

Equity ownership

Answer

Subject to market volatility

Question 42

Which type of investment typically offers a **lower** risk and **fixed** returns?

Accepted Answer

Bonds

Answer

Mutual funds

Answer

ETFs

Answer

Stocks

Question 43

What is the **primary** advantage of investing in mutual funds?

Accepted Answer

Diversification

Answer

No fees

Answer

Tax-free growth

Answer

Guaranteed high returns

Question 44

Which of the following is **not** a factor to consider when evaluating an investment opportunity?

Accepted Answer

Your personal preferences

Answer

Your risk tolerance

Answer

Your investment horizon

Answer

Your investment goals

Question 45

What is the **primary** purpose of dollar-cost averaging in investing?

Accepted Answer

Reducing market timing risk

Answer

Diversifying investment portfolio

Answer

Minimizing investment costs

Answer

Increasing potential returns

Question 46

What is the **primary** role of a financial advisor in the investment process?

Accepted Answer

Providing personalized guidance and tailored investment strategies

Answer

Managing day-to-day investment activities

Answer

Guaranteeing high investment returns

Question 47

Which of the following is NOT considered an investment vehicle?

Accepted Answer

Savings account

Answer

Stock

Answer

Mutual fund

Answer

Bond

Question 48

Which type of investment typically carries the highest risk and potential return?

Accepted Answer

Stock

Answer

Bond

Answer

Mutual fund

Answer

Exchange-traded fund (ETF)

Question 49

What is the primary purpose of a mutual fund?

Accepted Answer

Provide diversification and reduce risk

Answer

Guarantee a high rate of return

Answer

Maximize short-term profits

Answer

Allow investors to trade stocks directly

Question 50

Which of the following is an advantage of investing in stocks over bonds?

Accepted Answer

Higher potential return

Answer

Guaranteed income

Answer

Tax benefits

Answer

Lower risk

Question 51

What is the purpose of diversification in an investment portfolio?

Accepted Answer

Reduce overall risk

Answer

Increase potential return

Answer

Guarantee a positive return

Answer

Eliminate all risk

Question 52

What is an advantage of consulting a financial advisor?

Accepted Answer

Personalized guidance and professional expertise

Answer

Access to exclusive investment opportunities

Answer

Guaranteed high returns

Answer

No fees