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Quiz: Saving and Investing

Test your understanding of saving and investing concepts.

1. What is the main difference between saving and investing?

  1. Saving is for short-term goals with low risk; investing is for long-term goals with higher potential returns
  2. Saving always earns more interest than investing
  3. Investing is only for wealthy people; saving is for everyone
  4. Saving and investing are the same thing
Show Answer

The correct answer is A. Saving typically involves low-risk accounts (savings accounts, CDs) for short-term goals and emergency funds. Investing involves buying assets (stocks, bonds, real estate) with higher potential returns but also higher risk, suitable for long-term goals like retirement. Option B is backwards—investments typically offer higher returns. Option C is false—anyone can invest. Option D is incorrect—they serve different purposes.

Concept Tested: Investment Fundamentals

See: Saving vs Investing

2. What is diversification?

  1. Investing all your money in one stock you believe in
  2. Spreading investments across different assets to reduce risk
  3. Only investing in bonds for safety
  4. Timing the market to buy low and sell high
Show Answer

The correct answer is B. Diversification means spreading investments across different asset classes (stocks, bonds), sectors (technology, healthcare, energy), and geographic regions to reduce risk. If one investment performs poorly, others may perform well, balancing overall returns. Option A is the opposite of diversification. Options C and D don't capture the concept of spreading risk.

Concept Tested: Diversification

See: Diversification Strategies

3. Which investment typically has the highest long-term average return?

  1. Savings accounts
  2. Bonds
  3. Stocks
  4. Certificates of Deposit (CDs)
Show Answer

The correct answer is C. Historically, stocks have averaged about 10% annual returns over the long term (decades), though with significant volatility. Bonds average 3-5%, savings accounts and CDs currently offer 4-5% but historically much lower. Higher returns come with higher risk—stocks can lose value in the short term, but time smooths out volatility.

Concept Tested: Investment Returns

See: Risk and Return

4. What is an index fund?

  1. A fund that tries to beat the market through active management
  2. A fund that tracks a specific market index like the S&P 500
  3. A high-risk investment in individual stocks
  4. A type of savings account
Show Answer

The correct answer is B. An index fund is a mutual fund or ETF that tracks a specific market index (like the S&P 500 or total stock market) by owning all or a representative sample of the securities in that index. Index funds offer broad diversification, low fees, and typically outperform actively managed funds over time. Options A, C, and D describe different investment types.

Concept Tested: Index Funds

See: Index Fund Investing

5. You invest $5,000 at 7% annual return. Using the Rule of 72, approximately how many years will it take to double your money?

  1. 7 years
  2. 10 years
  3. 14 years
  4. 20 years
Show Answer

The correct answer is B. The Rule of 72 estimates doubling time by dividing 72 by the annual return percentage: 72 ÷ 7 = approximately 10.3 years. This quick mental math helps you understand the power of compound growth. The actual precise answer is 10.24 years, so option B is correct. Options A, C, and D don't follow the Rule of 72 formula.

Concept Tested: Rule of 72

See: Compound Interest

6. What is dollar-cost averaging?

  1. Trying to time the market by buying when prices are lowest
  2. Investing a fixed amount of money at regular intervals regardless of market conditions
  3. Only buying stocks that cost less than $1 per share
  4. Selling investments to lock in gains
Show Answer

The correct answer is B. Dollar-cost averaging means investing a fixed amount regularly (like $200 every month) regardless of whether prices are high or low. When prices are high, you buy fewer shares; when low, you buy more. This averages out your purchase price over time and removes emotion from investing. This is what happens automatically with 401(k) contributions.

Concept Tested: Dollar-Cost Averaging

See: Investment Strategies

7. Which statement about bonds is true?

  1. Bonds are loans you make to companies or governments that pay you interest
  2. Bonds are riskier than stocks
  3. Bonds guarantee you will never lose money
  4. Bonds always provide higher returns than stocks
Show Answer

The correct answer is A. When you buy a bond, you're lending money to a corporation or government entity. They pay you fixed interest (coupon payments) and return your principal at maturity. Option B is backwards—bonds are typically less risky than stocks. Option C is false—bonds can lose value if interest rates rise or if the issuer defaults. Option D is false—bonds typically offer lower returns than stocks.

Concept Tested: Bonds

See: Understanding Bonds

8. What is the relationship between risk and return in investing?

  1. Higher risk investments typically offer higher potential returns
  2. Lower risk investments always provide better returns
  3. Risk and return are unrelated
  4. All investments have the same risk-return profile
Show Answer

The correct answer is A. Generally, investments with higher risk (like stocks) offer higher potential returns to compensate investors for taking that risk. Lower-risk investments (like savings accounts and bonds) offer lower but more predictable returns. This risk-return tradeoff is fundamental to investing. Options B, C, and D contradict this established investment principle.

Concept Tested: Risk and Return

See: Risk and Return Relationship

  1. 100% bonds for safety
  2. 80-90% stocks, 10-20% bonds for growth
  3. 50% stocks, 50% cash
  4. 100% cash in savings accounts
Show Answer

The correct answer is B. Young investors have decades to recover from market downturns, so they can afford to take more risk for higher growth potential. An allocation of 80-90% stocks and 10-20% bonds is appropriate. Options A and D are too conservative and won't provide sufficient growth for retirement. Option C is overly cautious and leaves too much in cash earning minimal returns.

Concept Tested: Asset Allocation

See: Asset Allocation by Age

10. What is the main advantage of investing in a Roth IRA over a taxable brokerage account?

  1. Higher contribution limits
  2. All growth and withdrawals in retirement are tax-free
  3. No income limits for eligibility
  4. You can withdraw contributions anytime without penalty even before retirement
Show Answer

The correct answer is B. Roth IRAs offer tax-free growth and tax-free withdrawals in retirement—you never pay taxes on investment gains. Taxable accounts require you to pay capital gains taxes on profits. Option A is false—Roth IRAs have lower limits ($7,000/year) than taxable accounts (unlimited). Option C is false—Roth IRAs have income limits. Option D is true but is a secondary benefit, not the main advantage.

Concept Tested: Investment Account Types

See: Tax-Advantaged Accounts