Personal Finance Chapter 11

What is the first question to ask yourself when deciding whether to save or invest?

a. How much money do I have in

an emergency fund?

b. When will I need the money?

c. Is the money insured?

d. Can i get at least a 10% return

in this money?

B

You just received a $5,000 gift from your rich uncle and you don't know whether to invest or save the money. You want to use the money to help purchase a new car in four years. Where should you invest the money?

a. In a safe, insured, guaranteed

investment

b. In an index mutual fund

c. In gold or other precious

metals

d. Under your mattress

A

Which of the following would be considered an appropriate savings vehicle for an emergency fund?

a. Savings account

b. Precious metals

c. Oil futures

d. Antique cars

A

Savings:

a. Should be used for

accumulating enough money

to cover day-to-day expenses

b. Will not necessarily make you

rich, but will keep you from

being poor

c. Should consist of three to six

months of income

d. All of the above

D

Which instrument does not have a zero default risk for a$100,000 investment?

a. A Federal Deposit Insurance

Corporation(FDIC) account

b. A National Credit Union

Association(NCUA) account

c. A mutual fund

d. U.S. Treasury bills

C

Inflation:

a. Has no impact on your savings

and investments

b. Causes prices to decrease

over time

c. Makes your money grow faster

d. Is the overall increase in the

price of goods and services

over time

D

What proportion of your income should you have in savings?

a. 2-3 months of income

b. 3-6 months of income

c. 12 months of income

d. 2 years of income

B

The general rule of thumb is the ______ the risk, the ______ the return will be.

a. Higher; higher

b. Lower; higher

c. Higher; lower

d. Lower; higher

e. (a) and (d)

f. (b) and (c)

A

For people to invest in riskier investments, the investment must pay a(n)______ to offset the risk.

a. Investment premium

b. Investment incentive

c. Personal guarantee

d. Risk premium

D

Default risk:

a. Is the risk that a firm in which

you have invested will declare

bankruptcy and your

investment will become

worthless

b. Should be calculated as part

of your risk premium

c. Is zero for FDIC- and NCUA-

insured accounts, up to

$250,000

d. All of the above

D

Interest rate risk:

a. Is the risk associated with an

increase or decrease in

interest rates

b. Applies only to bonds

c. Is not considered in the risk

premium

d. All of the above

D

Market risk:

a. Is the risk that the value of you

investment will decrease due

to changes in the market

b. Increases when the market has

dramatic swings in prices from

highs to lows

c. Should be calculated as part

of your risk premium

d. All of the above

D

Liquidity risk:

a. Is the risk that you will not be

able cash out your investment

quickly enough to either meet

your cash flow needs or

prevent a loss

b. Only applies to the housing

market

c. Increases as the liquidity of an

investment strategy

d. All of the above

D

Risk tolerance for savings and investments:

a. Is the same for every individual

b. Is dependent on the individual

c. Is not important when deciding

on an investment strategy

d. Is the same for every

investment vehicle

B

According to the investment pyramid, a person with high risk tolerance who is looking to invest money for the long-term might invest in ____ to maximize the possibility of a high return

a. Certificates of deposit

b. Fixed-income mutual funds

and high-grade corporate

bonds

c. Balanced mutual funds

d. Precious metals

D

The base of the investment pyramid consists of:

a. U.S. Treasury securities, insured

savings, checking accounts,

certificates of deposits, and

U.S. savings bond

b. Money market accounts, fixed-

income mutual funds, high-

grade corporate bonds, and

municipal bonds

c. Blue-chip stocks

d. Junk bonds, real estate, and

aggressive growth funds

A

The investment pyramid:

a. Was created in Egypt

b. Is not a reflection of the risk of

investment

c. Is only for people with

incomes over $100,000

annually

d. Is a classification for

investments based on their risk

D

You should evaluate your investments:

a. Only when you make the initial

investment

b. At least once a year or any

time there is a major life

change

c. Only when you sell an

investment

d. Only when the market

decreases 10% or more

B

Which instrument is not typical for someone in the Independent personal finance life stage?

a. Direct deposit into a savings

account

b. 529 college savings plan

c. Conservative mutual fund

d. Precious metals

e. Roth IRA

D

Which life stage is the best time to start putting money into a Roth IRA to start building your retirement fund?

a. Independent

b. Early Family

c. Empty Nest

d. Retirement

A

Money needed in the next 9 months should be put into a ________.

A) savings account

B) short-term certificate of deposit

C) U.S. Treasury bill

D) All options are correct.

D

The value of a dollar is

A) driven by the stock market.

B) steadily increasing.

C) controlled by the U.S. Treasury.

D) related to inflation.

D

________ is money set aside for future use in a secure, no-risk instrument.

A) An investment

B) Savings

C) Discipline

D) Allocation

B

The first question to ask when deciding whether to save or invest is:

A) How much money do I have in an emergency fund?

B) When will I need the money?

C) Is the money insured?

D) Can I get at least 10% return on this money?

B

Which of the following investments would be considered the most appropriate savings vehicle for an emergency fund?

A) Savings account

B) Certificate of deposit

C) Blue chip stocks

D) Rare jewels

A

The major types of risk are

A) inflation and taxation.

B) credit and bankruptcy.

C) default, interest rate, market, and liquidity.

D) None of the options are correct.

C

________ is the risk that the value of your investment will decrease due to changes in the market.

A) Default risk

B) Interest rate risk

C) Market risk

D) Liquidity risk

C

What proportion of your income should be in savings?

A) 2-3 months of income

B) 6-9 months of income

C) 12 months of income

D) 10%

B

To entice investors to take on riskier investments, the investment must pay a(n) ________ to offset the risk.

A) investment premium

B) investment incentive

C) personal guarantee

D) risk premium

D

Risk tolerance for savings and investing ________.

A) is the same for every individual

B) is dependent on the individual

C) is not important when deciding on an investment strategy

D) should decrease with inflation

B

To maintain a secure amount but still grow your money, ________ your investments across different risk options.

A) minimize

B) diversify

C) stratify

D) ladder

B

If you have a high-risk tolerance, and you want to invest money for the long term, you might invest in ________.

A) certificates of deposit

B) fixed-income mutual funds and high-grade corporate bonds

C) balanced mutual funds

D) precious metals

D

________ is all the investments you hold.

A) An asset allocation account

B) Diversification

C) A Portfolio

D) Your savings

C

________ is the diversification of the portfolio.

A) Asset allocation

B) Laddering

C) Portfolio

D) Savings

A

In which life stage is it the best time to invest in a Roth IRA and start building your retirement fund?

A) Independent

B) Young family

C) Empty nest

D) Retirement

A