Pf2017 Quiz 1: Investing, Saving, Budgeting
A review of savings and budgeting concepts for Eastside Prep Personal Finance course. Good luck!
Questions and Answers
- 1.
Your friend tells you that she can double her money in a savings account in 24 years. Based on Rule of 72, what do you estimate to be the interest rate on her savings account?
- A.
1.5%
- B.
2%
- C.
3%
- D.
6%
Correct Answer
C. 3%Explanation
The Rule of 72 states that to estimate the number of years it takes to double an investment, you divide 72 by the interest rate. In this case, if your friend can double her money in 24 years, we can estimate that the interest rate on her savings account is 3%.Rate this question:
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- 2.
If you deposit $200 into a savings account with an interest rate of 1% for 3 years, how much simple interest can you brag that you will earn after THREE years?WebRep currentVote noRatingnoWeight
- A.
$3
- B.
$5
- C.
$6
- D.
$60
Correct Answer
C. $6Explanation
The formula to calculate simple interest is Interest = Principal * Rate * Time. In this case, the principal is $200, the rate is 1%, and the time is 3 years. Plugging these values into the formula, we get Interest = $200 * 1% * 3 = $6. Therefore, you can brag that you will earn $6 in simple interest after three years.Rate this question:
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- 3.
A student completing their college education (with a bachelor's degree) at a four-year college can expect to earn how much more over a typical forty year career than a student with just a high school degree? WebRep currentVote noRating noWeight
- A.
$50,000
- B.
$250,000
- C.
About a million dollars
- D.
$5,000,000
Correct Answer
C. About a million dollarsExplanation
On average, individuals with a bachelor's degree earn significantly more over their lifetime compared to those with just a high school degree. The difference in earnings can vary based on factors such as career choice and location, but studies have shown that individuals with a bachelor's degree can earn around a million dollars more over a typical forty-year career compared to those with just a high school degree. This is due to the increased job opportunities and higher earning potential that comes with a college education.Rate this question:
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- 4.
How do you EARN interest? WebRep currentVote noRating noWeight
- A.
Borrow money from a bank
- B.
Invest money in the stock market
- C.
Save money in a bank
- D.
Invest in real estate
Correct Answer
C. Save money in a bankExplanation
Saving money in a bank allows you to earn interest. When you deposit money into a savings account, the bank pays you interest on that amount. The interest is a percentage of the money you have saved, and it is typically paid to you on a regular basis, such as monthly or annually. This is a way to earn passive income on your savings, as the interest adds to the total amount of money in your account over time.Rate this question:
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- 5.
Which of these savings vehicles would work best today if you DO NOT need to access the money for a number of years AND wanted the highest interest rate possible? WebRep currentVote noRatingnoWeight
- A.
Regular Savings Account
- B.
Certificate of Deposit (CD)
Correct Answer
B. Certificate of Deposit (CD)Explanation
A Certificate of Deposit (CD) would work best in this scenario because it offers a higher interest rate compared to a regular savings account. With a CD, the money is locked in for a specific period of time, typically ranging from a few months to several years. Since the money is not needed for a number of years, the individual can take advantage of the higher interest rate offered by the CD. This allows for the money to grow at a faster rate compared to a regular savings account.Rate this question:
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- 6.
Based on the rule of 72, a savings account earning 6% per year would allow you to double your money after...WebRep currentVote noRatingnoWeight
- A.
6 years
- B.
8 years
- C.
12 years
- D.
18 years
Correct Answer
C. 12 yearsExplanation
The rule of 72 is a quick way to estimate how long it takes for an investment to double in value. It is calculated by dividing 72 by the annual interest rate. In this case, since the savings account is earning 6% per year, we divide 72 by 6 to get 12. Therefore, it would take 12 years for the money in the savings account to double.Rate this question:
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- 7.
What would be the BALANCE of your savings account after THREE months if the savings account had an ANNUAL interest rate of 6% and you started with principal of $1,000? In other words, what would be the total amount in your account after three months?
- A.
$60
- B.
$30
- C.
$1,015
- D.
$1,030
Correct Answer
C. $1,015Explanation
After three months, the balance of the savings account with an annual interest rate of 6% and a principal of $1,000 would be $1,015. This can be calculated by multiplying the principal by (1 + interest rate/12) raised to the power of the number of months. In this case, (1 + 6%/12)^3 = 1.015, and when multiplied by the principal of $1,000, it gives $1,015. Therefore, the total amount in the account after three months would be $1,015.Rate this question:
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- 8.
You are considering opening a savings account and are considering these two options:
- Bank A is in NOT in FDIC program, has interest rate of 5%, minimum deposit of $25 and fees that are competitive to other banks.
- Bank B is in the FDIC program, has interest rate of 0.01%, minimum deposit of $50 and competitive fees.
- A.
Bank A
- B.
Bank B
- C.
Bank A and Bank B are the same
Correct Answer
B. Bank BExplanation
Bank B would be the preferred choice because it is in the FDIC program, which means that the deposits are insured up to $250,000 per depositor. This provides a level of protection for the deposited funds in case the bank fails. Bank A, on the other hand, does not offer this insurance. Although Bank A has a higher interest rate, the added security provided by the FDIC program makes Bank B a more reliable option. Additionally, Bank B has competitive fees and a slightly higher minimum deposit requirement, which may not be a significant factor in the decision-making process.Rate this question:
- 9.
What was the MOST important lesson of the Bank Manager role play, when a volunteer came to the front of the class to discuss opening a savings account with Bill?WebRep currentVote noRatingnoWeight
- A.
Savings accounts have low interest rates today
- B.
Bank managers are usually straightforward in describing their savings products
- C.
When pressured to sign an application to open an account (or buy a financial product), it is best to ask for time to review the materials and to walk away.
- D.
It is best not to ask questions but to just let the bank manager describe their savings products.
Correct Answer
C. When pressured to sign an application to open an account (or buy a financial product), it is best to ask for time to review the materials and to walk away.Explanation
The most important lesson of the Bank Manager role play is that when pressured to sign an application to open an account or buy a financial product, it is best to ask for time to review the materials and to walk away. This implies that individuals should not make hasty decisions and should take the time to thoroughly understand the terms and conditions before committing to any financial product. This approach ensures that individuals make informed choices and avoid potential financial risks.Rate this question:
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- 10.
Which of the statements below would be considered good advice for creating a budget (SELECT ALL ANSWERS THAT ARE CORRECT)?WebRep currentVote noRatingnoWeight
- A.
Set aside money for Savings FIRST
- B.
Be sure that your WANTS are met first before you set aside money for your NEEDS.
- C.
Keep your expenses less than your income so that your budget will be in surplus.
- D.
Be sure to compare your budget plan with your actual spending so that you can determine if you are staying within your budget.
- E.
Only consider what to save after your wants and needs have been taken care of first.
Correct Answer(s)
A. Set aside money for Savings FIRST
C. Keep your expenses less than your income so that your budget will be in surplus.
D. Be sure to compare your budget plan with your actual spending so that you can determine if you are staying within your budget.Explanation
The correct answer is to set aside money for savings first, keep your expenses less than your income so that your budget will be in surplus, and be sure to compare your budget plan with your actual spending so that you can determine if you are staying within your budget. By setting aside money for savings first, you prioritize saving and ensure that you are building financial security. Keeping your expenses less than your income helps you avoid debt and allows you to have extra money for savings. Comparing your budget plan with your actual spending helps you track your expenses and make necessary adjustments to stay within your budget.Rate this question:
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- 11.
When banks provide information about savings accounts, they typically quote the interest rates they offer (for example, our 5 year CD offers interest rate of 2.5%) on a...
- A.
Daily basis
- B.
Monthly basis
- C.
Six Months basis
- D.
Annual (or per year) basis
Correct Answer
D. Annual (or per year) basisExplanation
Banks typically quote the interest rates they offer on a per year basis. This means that the interest rate is calculated and paid out annually. This allows customers to easily compare the rates offered by different banks and make informed decisions about where to save their money. Quoting the interest rate on an annual basis also provides a consistent measure for comparing different savings options, regardless of their term or compounding frequency.Rate this question:
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- 12.
True or False. When looking at which college majors earned the highest starting salaries in 2015, it is clear that students who had technical skills gained from STEM majors (Science, Technology, Engineering and Math) had most of the positions in the "top 10 list."WebRep currentVote noRatingnoWeight
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The explanation for the given correct answer is that the statement is stating that students who had technical skills gained from STEM majors had most of the positions in the top 10 list of college majors with the highest starting salaries in 2015. This means that the majority of the majors in the top 10 list were STEM majors, indicating that students with technical skills from these majors had higher earning potential compared to other majors.Rate this question:
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- 13.
You purchase one share of Wal-Mart stock on January 1, 2017 for $100.00. You decide to sell the stock on March 1, 2017 when the stock price was $97.00. The profit (or loss) on your Wal-Mart investment is:WebRep currentVote noRatingnoWeight
- A.
Your profit is $3 per share
- B.
Your loss is $3 per share
- C.
Your profit is $100 per share
- D.
Your profit is $97 per share
- E.
Your profit is $197 per share
Correct Answer
B. Your loss is $3 per shareExplanation
The question asks for the profit or loss on the investment. In this case, the stock was purchased for $100 and sold for $97, resulting in a loss of $3 per share.Rate this question:
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- 14.
You are putting together your first budget after graduating from college. Your take-home or net pay from your job will be $2,500 per month. You estimate your monthly costs to be rent of $800, car payment of $350, car insurance of $150, car maintenance of $50, entertainment of $500, food expense of $250, mobile phone of $100, cable bill of $75, personal car expenses of $100 and other expense of $300. How would you describe your budget after analyzing all of your income and expenses? WebRep currentVote noRatingnoWeight
- A.
You have a surplus of $175
- B.
You have a deficit of $175
- C.
You have a balanced budget
- D.
You have a deficit of $2,675
- E.
You have a surplus of $2,500
Correct Answer
B. You have a deficit of $175Explanation
Based on the given information, the total monthly expenses amount to $2,675 ($800 + $350 + $150 + $50 + $500 + $250 + $100 + $75 + $100 + $300). Since the monthly income is $2,500, which is less than the total expenses, there is a deficit of $175.Rate this question:
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- 15.
You are considering your investment options. Your choices are to buy stock in Facebook, Google, Nike, McDonalds or the S&P500 Index Fund. Which investment will provide you with a diversified investment and therefore lower your risk? WebRep currentVote noRatingnoWeight
- A.
Facebook
- B.
Google
- C.
S&P500 Index Fund
- D.
McDonalds
- E.
Chipotle
Correct Answer
C. S&P500 Index FundExplanation
Investing in the S&P500 Index Fund will provide a diversified investment and lower the risk. The S&P500 Index Fund is a type of mutual fund or exchange-traded fund that tracks the performance of the S&P500 index, which includes 500 large companies listed on the US stock exchanges. By investing in this fund, you are essentially investing in a broad range of companies across various sectors, which helps to spread out your investment and reduce the impact of any single company's performance on your overall portfolio. This diversification can help lower the risk compared to investing in individual stocks like Facebook, Google, Nike, or McDonalds.Rate this question:
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- 16.
You put $500 in a savings account with an interest rate of 10% per year (not a realistic rate in today's world). Assuming that the bank offers you the benefit of compound interest, what would the BALANCE in your account be after 2 years?WebRep currentVote noRatingnoWeight
- A.
Less than $600
- B.
More than $600
- C.
Exactly $600
- D.
$550
- E.
$100
Correct Answer
B. More than $600Explanation
If the interest is compounded annually, the balance in the account after 2 years can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal amount (initial deposit), r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years. In this case, P = $500, r = 10% or 0.10, n = 1 (compounded annually), and t = 2. Plugging in these values, the formula becomes A = $500(1 + 0.10/1)^(1*2) = $500(1.10)^2 = $500(1.21) = $605. Therefore, the balance in the account after 2 years would be more than $600.Rate this question:
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- 17.
When comparing investment choices, which statement below is TRUE?WebRep currentVote noRatingnoWeight
- A.
Investing in the stock market carries NO risk of losing money
- B.
While the stock market has generated long-term returns of 7-9% a year, it has had years where people have lost money too
- C.
Over the past 50-60 years, savings accounts have provided higher returns than investing in the stock market
- D.
According to Warren Buffett, it is easy to find stocks that will perform better than the S&P500
- E.
The goal of any investor is to buy a stock when its price is high and sell the stock when the price is low
Correct Answer
B. While the stock market has generated long-term returns of 7-9% a year, it has had years where people have lost money tooExplanation
The statement is true because while the stock market has generally provided positive long-term returns, there have been periods where investors have experienced losses. This is due to the volatility and unpredictability of the market, which can result in fluctuations in stock prices and potential losses for investors. It is important to consider the potential risks and fluctuations in the market when making investment choices.Rate this question:
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- 18.
You have $25 to open a savings account. You are most interested in having easy access to your money and finding an account type that has low minimum balance requirements. You are less interested in earning a high interest rate. What type of account would you choose?WebRep currentVote noRatingnoWeight
- A.
Certificate of Deposit
- B.
Regular savings account
- C.
Stock index fund like the S&P500 Fund
Correct Answer
B. Regular savings accountExplanation
A regular savings account would be the best choice in this scenario because it allows for easy access to the money and typically has low minimum balance requirements. While it may not offer a high interest rate, the main priority in this situation is having easy access to the funds rather than earning a significant return on investment. A certificate of deposit would lock the money away for a specific period of time, limiting access, and a stock index fund like the S&P500 Fund involves investing in the stock market and carries a higher level of risk.Rate this question:
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- 19.
You open a new bank account at Eastside Savings and see the FDIC stickers all around the bank branch. You also go to the FDIC website to double check and see that the Eastside Savings branch you bank at is on the FDIC's list also. Your savings balance is $500. You hear on the radio that Eastside Savings is having trouble and may close down. What would happen if Eastside Savings failed?WebRep currentVote noRatingnoWeight
- A.
You would lose all your money.
- B.
You could lose $250 since FDIC insurance only covers 50% of the money you have deposited.
- C.
You would receive all the money you have deposited at Eastside Savings since FDIC insurance covers accounts up to $250,000.
- D.
You would receive $250,000 since FDIC insurance provides each account at the bank with $250,000 regardless of how much they have deposited.
Correct Answer
C. You would receive all the money you have deposited at Eastside Savings since FDIC insurance covers accounts up to $250,000.Explanation
If Eastside Savings were to fail, the individual would receive all the money they have deposited at the bank. This is because the FDIC insurance covers accounts up to $250,000, regardless of the amount deposited.Rate this question:
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- 20.
InvestmentPurchase PriceCurrent PriceReturn (%age)Apple$94.00$100.00?????McDonalds$73.00$65.00????Google$500.00$515.00????You have three stocks that you bought earlier this year. You are looking at their current prices and curious as to how the stocks have performed relative to each other. You are using their percentage return as your measurement tool. Rank order the stocks from HIGHEST return to LOWEST return. Remember to calculate the percentage return for each stock to arrive at your answer. WebRep currentVote noRatingnoWeight
- A.
Google, Apple, McDonalds
- B.
Apple, Google, McDonalds
- C.
McDonalds, Apple, Google
- D.
Apple, McDonalds, Google
- E.
They all have the same percentage returns.
Correct Answer
B. Apple, Google, McDonaldsExplanation
The correct answer is Apple, Google, McDonalds. This is determined by calculating the percentage return for each stock. Apple has a return of (100-94)/94 = 6.38%. Google has a return of (515-500)/500 = 3%. McDonalds has a return of (65-73)/73 = -10.96%. Therefore, Apple has the highest return, followed by Google, and then McDonalds.Rate this question:
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- 21.
What was a key takeaway from the webquest activity you did in class to find the best regular savings account and certificate of deposit? WebRep currentVote noRatingnoWeight
- A.
All banks have the same interest rates on savings accounts so you should not waste time searching for the best ones
- B.
The largest banks (Chase, Bank of America, Wells Fargo) typically offer the highest interest rates on savings accounts and CDs.
- C.
Best Google search strategy is to research one bank at a time
- D.
Spending the time to comparison shop is a good habit as it can help you find the best deal since not all savings accounts have the same interest rates
Correct Answer
D. Spending the time to comparison shop is a good habit as it can help you find the best deal since not all savings accounts have the same interest ratesExplanation
The correct answer states that spending time to comparison shop is a good habit because not all savings accounts have the same interest rates. This suggests that there is variation in interest rates among different savings accounts, implying that some accounts may offer better deals than others. Therefore, taking the time to compare different options can help one find the best deal.Rate this question:
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- 22.
Analyze the chart below. Select ALL the statements below that are true. AnalyzeWebRep currentVote noRatingnoWeight
- A.
You can expect to earn more money if you have an Associates degree (2 years) as compared to a Bachelor's degree (4 years).
- B.
Excluding Doctoral degrees, as you increase your level of education you increase your potential earnings and reduce your risk of being unemployed.
- C.
If you go to college but don't earn a degree on average you still earn as much as a student with a bachelor's degree (degree from a four-year college).
- D.
When looking at median weekly earnings, those with a bachelor's degree earn about $412 more per week than a high school graduate.
Correct Answer(s)
B. Excluding Doctoral degrees, as you increase your level of education you increase your potential earnings and reduce your risk of being unemployed.
D. When looking at median weekly earnings, those with a bachelor's degree earn about $412 more per week than a high school graduate.Explanation
The answer is correct because it accurately states that as the level of education increases, potential earnings also increase and the risk of being unemployed decreases. This is supported by the information provided in the chart. Additionally, the answer correctly states that individuals with a bachelor's degree earn about $412 more per week than high school graduates when looking at median weekly earnings.Rate this question:
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- 23.
Which of the following are important criteria when selecting a savings account? (CHECK ALL THAT APPLY)WebRep currentVote noRatingnoWeight
- A.
FDIC insurance
- B.
Quality of their commercials
- C.
Interest rate earned
- D.
Minimum deposit
- E.
Fees
Correct Answer(s)
A. FDIC insurance
C. Interest rate earned
D. Minimum deposit
E. FeesExplanation
When selecting a savings account, it is important to consider the criteria of FDIC insurance, interest rate earned, minimum deposit, and fees. FDIC insurance ensures that the funds deposited in the account are protected up to a certain amount in case the bank fails. The interest rate earned determines the amount of money that will be earned on the deposited funds over time. The minimum deposit requirement is important to know as it may affect the ability to open the account. Lastly, fees should be considered as they can impact the overall profitability of the savings account.Rate this question:
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- 24.
Your friend tells you that she wants to set up an emergency savings fund so that she has SIX months of expenses saved. This will provide her with peace of mind that she can deal with any personal emergencies that life can throw her way.
- She tells you she plans to spend $30,000 in one year (this is her expenses).
- She earns $50,000 per year and plans to save 10% of her earnings every year.
- A.
1 year
- B.
2 years
- C.
3 years
- D.
4 years
Correct Answer
C. 3 yearsExplanation
Based on the information given, your friend plans to save 10% of her earnings every year. Since she earns $50,000 per year, she will be saving $5,000 per year. She wants to save $30,000, which is equal to 6 months of her expenses. Therefore, it will take her $30,000 / $5,000 = 6 years to save up 6 months of expenses. However, the question asks for the time it will take to build up her emergency savings fund, which is defined as 6 months of expenses. Since 6 months is half of a year, it will take her half of the time, which is 6 years / 2 = 3 years.Rate this question:
- 25.
Read this passage about savings trends in the United States: "If you don't have emergency savings, what do you do when you have an unplanned expense or the money runs out before the bills do?" McBride says. "You're stuck.That means for some people (turning to) high-cost borrowing, check cashing, a payday lender."Another obstacle blocking our road to financial security: Americans' proclivity for buying stuff, McBride says."I've had people stand in front of me with a $5 latte and a $500 iPad and say they couldn't possibly save more than they are now," McBride says.It takes discipline, he says. And some are choosing to live more simply in order to stay ahead. Jeremy Roberts, 30, says he and his wife Charity decided to start living "off much less than we make," as they realized how slowly the economy was recovering.Which of the statements below is the key theme of this passage? WebRep currentVote noRatingnoWeight
- A.
People who don't have emergency savings often pay high interest rates to borrow money
- B.
It is better to buy things that are considered "wants" rather than save since saving is hard.
- C.
Since it is easy to control and predict our spending habits, it is OK not to have emergency savings.
- D.
Spending more than you earn is a good strategy to build up savings.
Correct Answer
A. People who don't have emergency savings often pay high interest rates to borrow moneyExplanation
The passage discusses the consequences of not having emergency savings and the options people resort to when faced with unplanned expenses. It mentions that individuals without savings may turn to high-cost borrowing, such as payday lenders, which implies that they often pay high interest rates to borrow money. This statement is supported by the example of people relying on check cashing and payday lenders when they run out of money. Therefore, the key theme of the passage is that people who don't have emergency savings often pay high interest rates to borrow money.Rate this question:
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- 26.
You buy 1 share of Facebook for $100 from your broker. One month later, you sell that one share for $120. The percentage return on your investment is:
- A.
-20%
- B.
+20%
- C.
+100%
- D.
+120%
Correct Answer
B. +20%Explanation
The percentage return on your investment is +20%. This is calculated by taking the difference between the selling price and the buying price, which is $120 - $100 = $20. Then, dividing this difference by the buying price and multiplying by 100 to get the percentage return: ($20 / $100) * 100 = 20%.Rate this question:
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- 27.
You check your brokerage statement and see that you own the following:
- 3 shares of Twitter trading at $15 per share
- 10 shares of Apple trading at $120 per share
- 20 shares of Nike trading at $33 per share
- A.
$168
- B.
$1,500
- C.
$1,905
- D.
$2,615
Correct Answer
C. $1,905Explanation
The total value of the stocks that you own can be calculated by multiplying the number of shares you own with the price per share for each stock and then adding them all together. In this case, the calculation would be: (3 shares of Twitter * $15 per share) + (10 shares of Apple * $120 per share) + (20 shares of Nike * $33 per share) = $45 + $1200 + $660 = $1905.Rate this question:
- 28.
Which of these investments would you expect to earn the HIGHEST return?
- A.
Regular savings account
- B.
A Bond for a Utility company
- C.
A Certificate of Deposit
- D.
Owning a share in the S&P500 Fund
Correct Answer
D. Owning a share in the S&P500 FundExplanation
Owning a share in the S&P500 Fund would be expected to earn the highest return compared to the other investment options listed. The S&P500 Fund is a diversified index fund that tracks the performance of the 500 largest publicly traded companies in the United States. This means that by owning a share in the S&P500 Fund, an individual would be investing in a wide range of companies across various sectors, potentially leading to higher returns. On the other hand, a regular savings account, a bond for a utility company, and a certificate of deposit are generally considered to have lower returns and are considered safer investments.Rate this question:
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