finlit exam2 t/f

Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns.

True

When building an investment plan, an investor must consider the liquidity, the level or risk, the expected rate of return and the volatility of different investment. (T/F)

True

The percentage of your investments that should be invested in each asset class (stocks, bonds, cash) will be constant over your lifetime. (T/F)

False

Individuals can invest more heavily in stocks if they are investing for the long-term. (T/F)

True

Individuals who are older typically have a higher tolerance for risk. (T/F)

False

Your book states that many financial planners recommend that you subtract your age from 100, to get the % of your assets that can be invested in growth investments. (T/F)

True

Diversification provides a measure of safety and reduces overall risk. (T/F)

True

Companies issue stock to raise money, this is called Equity financing. (T/F)

True

Individuals that make an investment to become part owners of a company are called stockholders. (T/F)

True

A company that earns a yearly profit must pay out a dividend. (T/F)

False

When shareholder owns stock in XYZ corporation and decides to sell it, they typically sell it directly back to the XYZ corporation. (T/F)

false

People buy stocks because they can provide a source of income if the company pays dividends and there is potential for capital appreciation . (T/F)

true

The bondholder will earn the stated interest rate until the bond matures. (T/F)

True

The bond holder can keep the bond until its maturity date and then redeem it or they can sell it to another investor before maturity. (T/F)

True

Bonds can be purchased through a broker. (T/F)

True

A mutual fund pools money together from many investors to purchase various stocks, bonds and other assets. (T/F)

True

A mutual fund may hold hundreds of different stocks and/or bonds, with the goal of reducing risk by being diversified. (T/F)

True

All mutual funds have the same objectives. (T/F)

false

A major concern for investors who select mutual funds are fees as these fees reduce investment return. (T/F)

true

It is possible for an investor to hold a variety of individual stocks and hold a diversified portfolio. (T/F)

true

Over many years, the nationwide the average annual increase in real estate is 10% (T/F)

false

Investing in real estate should be considered a long-term investment, not a get-rich-quick scheme. (T/F)

true

Investing and gambling both involve risk. (T/F)

true

Investing in the stock market has a positive expected rate of return. (T/F)

true

Gambling has a positive expected rate of return. (T/F)

false

The House, when gambling, always has the edge. (T/F)

true

A gambler owns nothing. (T/F)

true

A stockholder owns a share of the company. (T/F)

true

Over time, the odds are in the favor of an investor but not for a gambler. (T/F)

true

Stockholders vote on the company’s board of directors and major corporate policies. (T/F)

True

Public companies must report earnings quarterly. (T/F)

True

Wall Street watches revenue and earnings data carefully and stock prices change based on this data (T/F)

true

A more speculative stock will have a Beta greater than 1. (T/F)

The Beta for the S&P 500 is 0. (T/F)

true

false

The majority of stock trading is done in the secondary market. (T/F)

true

The buy and hold strategy is recommended even during market declines. (T/F)

true

It is important to know the objective of a particular mutual fund before purchasing because the objectives can vary. (T/F)

true

Any of the different types of mutual funds (including a Life Cycle fund) can be offered and held within an individual’s own Retirement account (401(k) and 403(b) accounts). (T/F)

true

Index funds seek to earn the Market Average Returns. (T/F)

true

Actively managed funds tend to have lower fees than Index Funds and ETFs. (T/F)

false

History shows that it is extremely difficult for an Actively Managed Mutual Fund to beat the Indexes over time. (T/F)

true

Actively managed mutual funds attempt to beat the market but are rarely successful. (T/F)

true

Higher fees that actively managed funds charge significantly reduce long-term returns. (T/F)

true

For most investors, Index Funds and EFTs are a better choice than Actively Managed Funds. (T/F)

true

You can solely depend on Social Security and your Pension to cover your expenses while in retired. (T/F)

false

The majority of individuals who retire in 25 years will NOT have a Defined Benefit plan. (T/F)

true

The employee has the majority of risk with a Defined Benefit plan. (T/F)

false

The employer is responsible for investing money to be able to pay future liabilities associated with a Defined Benefit plan. (T/F)

true

Contributions are not taxed (the tax advantage is immediately recognized) (trad, roth, or both)

traditional retirement account

All earnings grow without taxation (tax-deferred). (trad, roth, or both)

both

Ordinary income taxes on both contributions and earnings will be due when the individual makes withdraws (trad, roth, or both)

traditional retirement account

Pay ordinary income taxes on contributions (No tax deduction) (trad, roth, or both)

roth retirement account

At retirement, no income tax on the money withdrawn (the tax advantage is recognized during retirement). (trad, roth, or both)

roth retirement account

Recommended if an investor thinks their tax rate will be lower in retirement. (trad, roth, or both)

traditional retirement account

Recommended if an investor thinks their tax rate will be higher in retirement. (trad, roth, or both)

roth retirement account

The IRS places a limit on the dollar value of contributions yearly. (trad, roth, or both)

both

If an individual’s income is greater than a specific income, they may NOT be allowed to contribute an IRA. (trad, roth, or both)

roth

Employers frequently match a portion of an employee’s contribution to a 401(k) plan. (T/F)

true

The employee has no say in the underlying investments in their 401(k) account. (T/F)

false

The employee typically can select various asset classes (managed mutual funds, index funds, targeted date retirement funds, bonds funds etc) where the money in their 401(k) is invested. (T/F)

true

Individuals who have a Defined Contribution Plan should be aware of the fees they are incurring. (T/F)

true

If an individual changes jobs and withdrawals the money they have in their 401(k) plan, they frequently must pay taxes on the withdrawal and pay significant penalties. (T/F).

true

Therefore, a better option is to leave to funds in the old employer’s plan or to roll it over into the new employer’s plan or to an IRA (T/F).

true

Individuals regardless of income can make yearly contributions to an IRA account. (T/F)

false

The IRS limits how much can be deposited yearly in any type of IRA, adjusting the amount periodically. (T/F)

true

Asset Allocation refers to the mix of stocks, bonds and cash an investor holds. (T/F)

true

Someone can typically invest more heavily in stocks if they are younger. (T/F)

false

Someone can typically invest more heavily in stocks when they are investing for the long-term. (T/F)

true

An individual’s purchase of bonds will be impacted by their desired asset allocation and diversification. (T/F)

true

Someone can invest more heavily in stocks if they have a low tolerance for risk. (T/F)

false

An investor holding one stock and one bond might have a diversified portfolio. (T/F)

false

Typically, is recommended that individuals save at 10-15% of their income for retirement. (T/F)

true

If an individual initially cannot save 10% of their income, they should save a smaller percent of their pay and then each year increase the percentage saved by a small amount. (T/F)

true

Having automatically deposits to a retirement account each pay period, increases the chance of success. (T/F)

true

Asset Allocation will change over an investor’s lifetime. (T/F)

true

As someone gets closer to retirement, it is typically recommended that the investor decrease the amount of stock held. (T/F)

true

To make a Will legally binding, an individual should have two witnesses (who are not listed as beneficiaries) and it is advisable to get it notarized by a notary public. (T/F)

true

Once any single activity begins demanding a person’s money and attention at the cost of their health and relationships, that activity can be considered an addiction. (T/F)

true

Knowing each other’s credit score. (T/F)

Creating a written cohabitation agreement. (T/F)

Closing individual accounts and having a joint checking account instead. (T/F)

true

true

false

Each person in the relationship should be held accountable for every dollar they spend. T/F

false

If someone has been married for at least 10 years before divorcing, they frequently can receive Social Security benefits based on the ex-spouse’s employment history. T/F

true

After the divorce is finalized, beneficiaries to insurance policies and 401(k) accounts do not have to be changed, if the individual has updated their Will. (T/F)

false