Personal Finance Chapter 2 Quiz
Chapter 2 Dave Ramsey Investment Options
Questions and Answers
- 1.
Which is NOT true about investments:
- A.
Never invest using borrowed money.
- B.
Diversification will help lower the risk
- C.
Always invest only for tax savings purposes.
- D.
Never invest only for tax savings purposes.
Correct Answer
C. Always invest only for tax savings purposes.Explanation
The statement "Always invest only for tax savings purposes" is not true about investments. While tax savings can be a motivating factor for some investments, it is not the only reason to invest. Investments are made to generate returns, build wealth, and achieve financial goals. Tax savings should be considered as one aspect of investment planning, but it should not be the sole focus. It is important to diversify investments and consider factors such as risk tolerance, time horizon, and investment objectives.Rate this question:
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- 2.
The risk return ration says:
- A.
When risk goes down, the return generally will go up.
- B.
When the risk goes up, the return generally will go down.
- C.
When the risk goes up, the return generally will go up.
- D.
None of the above.
Correct Answer
C. When the risk goes up, the return generally will go up.Explanation
The correct answer is "When the risk goes up, the return generally will go up." This is because when the risk of an investment increases, investors typically require a higher return to compensate for the additional risk they are taking. This is known as the risk-return tradeoff. Higher-risk investments have the potential for higher returns, but also a higher chance of loss. Therefore, when the risk increases, investors expect a higher return to justify the increased risk.Rate this question:
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- 3.
What is true about investing in a single stocks?
- A.
There is a low degree of risk.
- B.
There is a high degree of risk.
- C.
The risk is the same whether you invest in mutual funds or stocks.
- D.
If the stock is from your employer, the risk is lower.
Correct Answer
B. There is a high degree of risk.Explanation
Investing in a single stock carries a high degree of risk because the performance of that stock is solely dependent on the success of the individual company. Factors such as market conditions, industry trends, and company-specific risks can greatly impact the value of the stock. Unlike investing in mutual funds, where the risk is spread across a diversified portfolio of stocks, investing in a single stock puts all of one's investment at risk. Therefore, it is important for investors to carefully consider the risks involved before investing in a single stock.Rate this question:
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- 4.
Which is not a good investment?
- A.
Gold
- B.
Commodities
- C.
Viaticals
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
All of the options listed (Gold, Commodities, and Viaticals) are generally considered to be good investments. Gold is often seen as a safe haven asset and a hedge against inflation. Commodities, such as oil or agricultural products, can provide diversification and potential for profit. Viaticals involve investing in life insurance policies of terminally ill people, which can offer high returns. Therefore, it can be concluded that none of the options listed are considered a bad investment.Rate this question:
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- 5.
The KISS rule of investing teaches:
- A.
The more sophisticated the investment, the better.
- B.
Keep things simple and never buy something you don't understand.
- C.
It is normal to have investments you don't understand as long as you have a broker.
- D.
None of the above
Correct Answer
B. Keep things simple and never buy something you don't understand.Explanation
The KISS rule of investing teaches that it is important to keep things simple and never buy something you don't understand. This means that investors should avoid complex and sophisticated investments that they are not familiar with. Instead, they should focus on investments that they can easily comprehend and analyze. This approach helps to reduce the risk of making poor investment decisions and losing money. Having a broker does not justify investing in things that are not understood, as it is still crucial to have a clear understanding of the investments being made.Rate this question:
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- 6.
The most aggressive mutual funds tend to be from:
- A.
Companies that are a little younger and growing
- B.
Companies that are overseas
- C.
Companies that are older and well-established.
- D.
All of the above
Correct Answer
A. Companies that are a little younger and growingExplanation
Aggressive mutual funds typically invest in companies that have high growth potential. Younger and growing companies often offer higher growth potential compared to older and well-established companies. Additionally, investing in overseas companies can also provide opportunities for higher returns due to their potential for growth in emerging markets. Therefore, the correct answer is "Companies that are a little younger and growing."Rate this question:
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- 7.
Your piece of ownership in a company is called:
- A.
Portion
- B.
Dividend
- C.
Profit
- D.
Share of stock
Correct Answer
D. Share of stockExplanation
A share of stock represents ownership in a company. When you own a share of stock, you have a portion of the company's assets and earnings. This entitles you to certain rights, such as voting on company matters and receiving dividends, which are a portion of the company's profits distributed to shareholders. Therefore, "share of stock" is the correct term for the ownership stake in a company.Rate this question:
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- 8.
Which of the following is a risk to consider when investing?
- A.
You could lose all of your money
- B.
Inflation
- C.
Your money is not liquid
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
When investing, there are several risks to consider. One risk is the possibility of losing all of your money, which can happen if the investment fails or the market crashes. Another risk is inflation, which can erode the purchasing power of your money over time. Additionally, your money may not be easily accessible or liquid, meaning you may not be able to quickly convert it into cash when needed. Therefore, all of the options mentioned - losing all of your money, inflation, and lack of liquidity - are risks that investors should take into account.Rate this question:
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- 9.
Which one is not a type of annuity?
- A.
Variable
- B.
Fixed
- C.
Stable
- D.
None of the above
Correct Answer
C. StableExplanation
The question asks to identify the option that is not a type of annuity. The options "variable" and "fixed" are indeed types of annuities, as they refer to annuities with varying or fixed payments, respectively. However, the option "stable" is not a recognized type of annuity. Therefore, the correct answer is "stable".Rate this question:
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- 10.
A savings account with a certificate is a:
- A.
Bond
- B.
Annuity
- C.
C. D.
- D.
Viatical
Correct Answer
C. C. D.Explanation
A savings account with a certificate is commonly referred to as a Certificate of Deposit (C.D.). A C.D. is a type of time deposit offered by banks and credit unions where the account holder agrees to keep the money deposited for a fixed period of time, typically ranging from a few months to several years. In return, the financial institution pays a higher interest rate compared to regular savings accounts. The term "bond" refers to a debt security where an investor lends money to an entity, while "annuity" is a financial product that provides a series of regular payments over a specific period. "Viatical" refers to a type of investment involving the purchase of life insurance policies from terminally ill individuals.Rate this question:
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- 11.
Save or Invest? Prom is coming up in a few months...
- A.
Save
- B.
Invest
Correct Answer
A. SaveExplanation
Saving money would be a more suitable option in this scenario because prom is coming up in a few months. Saving money would allow the individual to set aside funds specifically for prom expenses, such as buying a dress or suit, getting a haircut, or purchasing tickets. Investing money, on the other hand, involves putting money into assets or ventures with the expectation of generating a return over time. Since prom is a short-term event, it would be more practical to save money for immediate expenses rather than investing it for long-term gains.Rate this question:
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- 12.
Save or Invest? Plan a retirement fund...
- A.
Save
- B.
Invest
Correct Answer
B. InvestExplanation
Investing is the correct answer because saving alone may not be enough to build a sufficient retirement fund. Investing allows individuals to grow their money over time by taking advantage of the power of compound interest and potential market returns. By investing in assets such as stocks, bonds, or real estate, individuals have the potential to earn higher returns and outpace inflation, which can help them achieve their retirement goals. Saving alone may not generate enough returns to keep up with the rising cost of living, making investing a more effective strategy for long-term wealth accumulation.Rate this question:
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- 13.
Save or Invest? You want to buy a car in two years...
- A.
Save
- B.
Invest
Correct Answer
A. SaveExplanation
Saving is the better option in this scenario because the individual wants to buy a car in two years. Investing involves putting money into assets that have the potential to generate a return over a longer period of time. However, since the time frame is relatively short, investing may carry more risk and uncertainty. Saving allows the individual to set aside money in a secure and easily accessible account, ensuring that the funds will be available when needed to purchase the car.Rate this question:
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- 14.
Save or Invest? Start a college fund for your baby...
- A.
Save
- B.
Invest
Correct Answer
B. InvestExplanation
Investing in a college fund for a baby is a smart choice because it allows the money to grow over time. By investing, the funds have the potential to earn a higher return compared to simply saving the money in a regular savings account. Investing in stocks, bonds, or mutual funds can provide better long-term growth and help to combat the effects of inflation. Starting early also allows for a longer time horizon, which means there is more time to recover from any potential market downturns. Overall, investing in a college fund for a baby is a strategic way to build wealth and ensure financial stability for their future education expenses.Rate this question:
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- 15.
Save or Invest? You want to buy a house within five years...
- A.
Save
- B.
Invest
Correct Answer
A. SaveExplanation
Saving would be the better option in this scenario because the individual wants to buy a house within a relatively short time frame of five years. Investing involves putting money into assets that have the potential for higher returns but also carry a higher level of risk. Given the short time horizon, investing may not be suitable as the market could be volatile and there might not be enough time to recover from any potential losses. Saving, on the other hand, allows the individual to accumulate funds gradually and safely for the purpose of purchasing the house.Rate this question:
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- 16.
Diversification means to spread around.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Diversification refers to the practice of spreading investments across different assets or sectors to reduce risk. By diversifying, investors can minimize the impact of any one investment's poor performance on their overall portfolio. Therefore, the statement "Diversification means to spread around" is true.Rate this question:
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- 17.
With all investments, as the risk goes up, the return goes down.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
This statement is incorrect. In general, higher risk investments have the potential for higher returns. When investors take on more risk, they expect to be compensated for it with higher profits. This is because riskier investments typically involve more uncertainty and volatility, which can lead to larger gains or losses. Therefore, it is not true that as the risk goes up, the return goes down.Rate this question:
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- 18.
Liquidity is the availability of your money.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement "Liquidity is the availability of your money" is true. Liquidity refers to the ease with which an asset or investment can be converted into cash without causing a significant impact on its market price. It represents the ability to access and use funds quickly and easily. Therefore, when we say that liquidity is the availability of your money, we mean that it refers to how easily your money can be accessed and used when needed.Rate this question:
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- 19.
100% of the ten-year periods in the history of the stock market made money.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement suggests that in every ten-year period in the history of the stock market, there has been a positive return on investment. This implies that regardless of the economic conditions or market fluctuations, investing in the stock market for a duration of ten years has always resulted in making money. However, it is important to note that this statement may not account for individual stocks or specific timeframes within the ten-year periods.Rate this question:
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- 20.
Real estate is the most liquid of all investments.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Real estate is not the most liquid of all investments. Liquidity refers to the ease and speed with which an asset can be converted into cash without significant loss of value. While real estate can be a valuable investment, it is generally considered less liquid compared to other investments such as stocks or bonds. Real estate typically requires more time and effort to sell, and the market for real estate can be more volatile and unpredictable. Therefore, the statement that real estate is the most liquid of all investments is incorrect.Rate this question:
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- 21.
A share is a piece of ownership in an annuity.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The given statement is false. A share is not a piece of ownership in an annuity. A share refers to a unit of ownership in a company or corporation, typically representing a portion of the company's assets and earnings. An annuity, on the other hand, is a financial product that provides a series of payments over a specified period of time, usually used as a retirement income. Therefore, the statement is incorrect.Rate this question:
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- 22.
A commodity is a savings account with a certificate.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
This statement is incorrect. A commodity is a raw material or primary agricultural product that can be bought and sold, such as gold, oil, or wheat. It is not a savings account with a certificate.Rate this question:
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- 23.
Profits that a company distributes to its shareholders are called dividends.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Dividends are indeed the profits that a company distributes to its shareholders. This is a common practice where companies share a portion of their earnings with their shareholders as a return on their investment. Dividends can be paid in the form of cash, additional shares, or other assets. It is a way for companies to reward their shareholders and provide them with a share of the company's success.Rate this question:
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Current Version
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Mar 22, 2023Quiz Edited by
ProProfs Editorial Team -
Sep 22, 2013Quiz Created by
Mdrich
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