Chapter 4 Formative Assessment

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  • 1/20 Questions

    When a corporation distributes their profit amongst their shareholders, these payments are called what?

    • Dividends
    • Interest
    • Retained Earnings
    • Income
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About This Quiz

The 'Chapter 4 Formative Assessment' quiz evaluates key financial concepts including dividends, mutual funds, Roth IRAs, IPOs, and investment risks. It is designed to test understanding and application of investment strategies and financial instruments, enhancing financial literacy.

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  • 2. 

    Which type of investments allows one to spread out their risk because their money is being placed in many investments and is being invested by a fund manager?

    • Mutual Fund

    • Stocks

    • Bonds

    • Savings Accounts

    Correct Answer
    A. Mutual Fund
    Explanation
    Mutual funds allow individuals to spread out their risk by investing in a diversified portfolio of many investments. These investments are managed by a fund manager, who makes decisions on behalf of the investors. By pooling money from multiple investors, mutual funds provide access to a wide range of securities, such as stocks and bonds. This diversification helps to mitigate the risk associated with investing in a single security, as losses from some investments can be offset by gains from others.

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  • 3. 

    When a corporation offers its shares to the general public to buy for the first time, this is called

    • An Initial Public Offering

    • An Initial First Offering

    • A Roth IRA

    • The buy price

    Correct Answer
    A. An Initial Public Offering
    Explanation
    An initial public offering (IPO) refers to the process of a corporation making its shares available to the general public for the first time. During an IPO, the company sells its shares to investors, allowing them to become shareholders and participate in the company's growth and profits. This is a significant event for a company as it provides an opportunity to raise capital and increase its visibility and reputation in the market. It is a common strategy for companies looking to expand and fuel their growth.

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  • 4. 

    A stock broker is someone who

    • Works for a company to sell you its shares.

    • Can buy and sell shares for you.

    • Sells you his shares in a company.

    • Buys your shares in a company.

    Correct Answer
    A. Can buy and sell shares for you.
    Explanation
    A stock broker is a professional who acts as an intermediary between investors and the stock market. They have the authority to buy and sell shares on behalf of their clients. Therefore, the correct answer is "can buy and sell shares for you."

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  • 5. 

    According to the investment pyramid that tracks degree of risk and degree of possible reward, three investments that are considered “lower risk, lower reward” are

    • Options, futures, collectibles.

    • Cash, government bonds, bank accounts.

    • Real estate, stocks, high income bonds

    • CDs, real estate, collectibles.

    Correct Answer
    A. Cash, government bonds, bank accounts.
    Explanation
    The correct answer is cash, government bonds, bank accounts. These investments are considered "lower risk, lower reward" because they have a lower degree of risk compared to other investment options. Cash, government bonds, and bank accounts are generally considered to be safe investments with a lower potential for loss. They may offer lower returns compared to other investments such as stocks or real estate, but they provide stability and security for investors.

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  • 6. 

    An investment that is liquid is one that you

    • Keep in the stock market.

    • Keep in a long-term bond. 

    • Can turn into cash, but with a penalty fee.

    • Can turn into cash easily.

    Correct Answer
    A. Can turn into cash easily.
    Explanation
    An investment that is liquid is one that can be easily converted into cash without incurring any penalty fees. This means that the investment can be sold or redeemed quickly and without any significant obstacles. This is in contrast to investments that may have restrictions or penalties for early withdrawal or require a lengthy process to convert into cash. Therefore, the correct answer is that a liquid investment can be turned into cash easily.

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  • 7. 

    If an investor wants to receive regular dividend payments, they should invest in

    • U.S. Savings Bonds.

    • Municipal bonds.

    • The stock of large, corporate companies.

    • The stock of small, start-up companies.

    Correct Answer
    A. The stock of large, corporate companies.
    Explanation
    Investing in the stock of large, corporate companies is a suitable choice for an investor who wants to receive regular dividend payments. Large, corporate companies typically have stable earnings and a consistent track record of paying dividends to their shareholders. These companies often have established business models, strong financial positions, and generate steady cash flows, which allows them to distribute a portion of their profits as dividends. Municipal bonds and U.S. Savings Bonds may not offer regular dividend payments, while investing in the stock of small, start-up companies can be more volatile and may not guarantee regular dividends.

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  • 8. 

    An investor who chooses to put their money in various financial products, such as Treasury bonds, CDs, stocks, mutual funds, and real estate, has a(n)

    • Liquid portfolio.

    • Illiquid portfolio.

    • Diversified asset allocation portfolio.

    • Non-diversified asset allocation portfolio.

    Correct Answer
    A. Diversified asset allocation portfolio.
    Explanation
    An investor who chooses to put their money in various financial products, such as Treasury bonds, CDs, stocks, mutual funds, and real estate, has a diversified asset allocation portfolio. This means that their investments are spread across different types of assets, reducing the risk of having all their eggs in one basket. By diversifying their portfolio, the investor can potentially minimize the impact of any one investment performing poorly, while also taking advantage of the potential gains from different asset classes.

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  • 9. 

    Complete the following statement: “The author recommends, as a general rule, that the majority of your investments should be in ____________ when you are in your 20s, moving toward a majority in ____________ by the time you are near retirement.”​

    • Capital appreciation; capital preservation

    • Bonds; stocks

    • IRA; Roth IRA

    • IRA; Employee Pension

    Correct Answer
    A. Capital appreciation; capital preservation
    Explanation
    The author suggests that when you are in your 20s, the majority of your investments should be focused on capital appreciation, which refers to investments that have the potential to increase in value over time. As you approach retirement, the author recommends shifting towards a majority in capital preservation, which involves investments that aim to protect the value of your assets and generate a steady income. This strategy takes into account the longer time horizon and higher risk tolerance in your 20s, and the need for more stability and income preservation as you near retirement.

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  • 10. 

    How much you invest in capital preservation and how much you place in capital appreciation depends, in part, on your age. A person who is in their late 50s should invest 

    • More of their money in capital preservation.

    • More of their money in capital appreciation.

    • All of their money in capital preservation.

    • All of their money in capital appreciation.

    Correct Answer
    A. More of their money in capital preservation.
    Explanation
    As a person approaches retirement age, it becomes more important to prioritize capital preservation over capital appreciation. This is because they have less time to recover from potential market downturns and need to protect their savings. By investing more in capital preservation, they can ensure that their money is relatively safe and secure, even if it means sacrificing potential higher returns.

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  • 11. 

    Which of the following types of bonds are described here: Interest is compounded twice a year, the bonds are guaranteed by the federal government, there is no state or local tax on the interest, but there is a penalty for redeeming before five years.

    • U.S. Savings Bonds

    • U.S. Treasury bonds, notes and bills

    • State municipal bonds

    • Corporate bonds

    Correct Answer
    A. U.S. Savings Bonds
    Explanation
    U.S. Savings Bonds are described by the given characteristics. They have interest that is compounded twice a year, they are guaranteed by the federal government, there is no state or local tax on the interest, and there is a penalty for redeeming before five years.

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  • 12. 

    Despite volatility in the stock market, between 1926 and 2008, stocks have produced an average annual return of 9.6%, which is

    • Double the return of bonds over the same period.

    • Slightly better than the return of bonds over the same period.

    • Equal to the return of bonds over the same period.

    • Half the return of CDs over the same period.

    Correct Answer
    A. Double the return of bonds over the same period.
    Explanation
    Between 1926 and 2008, stocks have produced an average annual return of 9.6%, which is double the return of bonds over the same period. This means that, on average, stocks have provided investors with a higher rate of return compared to bonds during this time frame. The statement implies that investing in stocks has been more profitable than investing in bonds over the given period.

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  • 13. 

    Which of the following is an advantage of a Roth IRA?

    • Income taxes are avoided on the capital gains, interest, and dividends

    • Income taxes are very low on the capital gains, interest, and dividends

    • High capital gains are guaranteed

    • High interest rates are guaranteed

    Correct Answer
    A. Income taxes are avoided on the capital gains, interest, and dividends
    Explanation
    An advantage of a Roth IRA is that income taxes are avoided on the capital gains, interest, and dividends. This means that any earnings or profits generated within the Roth IRA account are not subject to income taxes when withdrawn, allowing for potential tax-free growth. This can be beneficial for individuals who anticipate being in a higher tax bracket in the future or who want to minimize their tax liability in retirement.

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  • 14. 

    Which of the following statements is NOT true about mutual funds?

    • They are a form of indirect investing

    • They give the investor access to more diversity for less money

    • They offer less diversity than other investments

    • They are a dominant investment choice in many retirement accounts

    Correct Answer
    A. They offer less diversity than other investments
    Explanation
    Mutual funds actually offer more diversity than other investments. This is because mutual funds pool money from multiple investors and invest in a variety of securities such as stocks, bonds, and other assets. This diversification helps to spread risk and potentially increase returns. Therefore, the statement that they offer less diversity than other investments is not true.

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  • 15. 

    Which of the following is true of a dividend yield? The money dividends pay 

    • Varies, and is considered unearned income.

    • Is fixed, and considered unearned income.

    • Varies, and is considered earned income.

    • Is fixed, and considered earned income.

    Correct Answer
    A. Varies, and is considered unearned income.
    Explanation
    A dividend yield refers to the percentage of return that an investor receives from owning a particular stock in the form of dividends. The amount of money paid as dividends can vary depending on the company's performance and profitability. Dividends are considered unearned income because they are not directly generated from the investor's labor or active involvement. Therefore, the correct answer is "varies, and is considered unearned income."

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  • 16. 

    The author strongly advises that you should not invest all of your savings. Which of the following are funds that you should NOT invest?

    • Money you hope to use for a down payment on a house ten years from now

    • Money for a new car in three or four years

    • Money for a winter ski trip in ten months

    • Money left over after budgeting all expenses and savings goals

    Correct Answer
    A. Money for a winter ski trip in ten months
    Explanation
    Investing money for a winter ski trip in ten months is not advisable because the time horizon is too short. Generally, investments are made for the long term, as they require time to grow and generate returns. In this case, the money is needed in a relatively short period, and investing it may expose it to market volatility and the risk of losing value. It is more appropriate to keep this money in a safe and easily accessible savings account or a short-term investment with low risk.

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  • 17. 

    All of the following are powers of the Securities and Exchange Commission (SEC), except:

    • It requires public companies to file quarterly and annual reports

    • It recommends new laws and rules to be passed by Congress

    • It sets the fees brokers can charge clients for buying stock

    • It takes legal action against wrongdoers

    Correct Answer
    A. It sets the fees brokers can charge clients for buying stock
    Explanation
    The Securities and Exchange Commission (SEC) has the power to require public companies to file quarterly and annual reports, recommend new laws and rules to be passed by Congress, and take legal action against wrongdoers. However, setting the fees brokers can charge clients for buying stock is not within the powers of the SEC. This responsibility typically falls under the jurisdiction of self-regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA).

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  • 18. 

    The goal of an income investment is to

    • Maximize risk for higher returns

    • Delay the return on the investment until a future date

    • Increase current cash flow

    • Increase the value of an asset

    Correct Answer
    A. Increase current cash flow
    Explanation
    The goal of an income investment is to increase current cash flow. Income investments are typically designed to generate regular income in the form of interest, dividends, or rental payments. The focus is on generating a steady stream of cash flow in the present, rather than waiting for future returns or increasing the value of an asset. By increasing current cash flow, investors can use the income for immediate expenses or reinvest it to further grow their wealth.

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  • 19. 

    Growth investors make their money when

    • They buy a financial product or asset.

    • They sell a financial product or asset.

    • The value of the asset increases.

    • The value of the asset decreases.

    Correct Answer
    A. They sell a financial product or asset.
    Explanation
    Growth investors make their money when they sell a financial product or asset. This is because growth investors focus on investing in assets that have the potential to increase in value over time. They aim to buy these assets at a lower price and sell them at a higher price, thus making a profit. The increase in value of the asset allows growth investors to generate returns when they decide to sell it.

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  • 20. 

    A rise of one point in a share of any stock means an increase of 

    • One dollar in the dividend paid

    • One percent of the price earnings ratio

    • One percent over the previous day's price of stock

    • One dollar in the price of the stock

    Correct Answer
    A. One dollar in the price of the stock
    Explanation
    When the question states that "A rise of one point in a share of any stock," it implies that the stock's value has increased by one point. This increase in value corresponds to "one dollar in the price of the stock." Therefore, if the stock's value rises by one point, its price will increase by one dollar.

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Quiz Review Timeline (Updated): Mar 22, 2023 +

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  • Current Version
  • Mar 22, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • May 18, 2015
    Quiz Created by
    Canderson362
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