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ecretary of State

Indiana Securities Division

Securities Division > Indiana MoneyWise > Investing 101 > Test Your Investment Knowledge > Test Your Investment Knowledge Test Your Investment Knowledge

Question

Question 1
If you buy a company's stock...

A. You own a part of the company
B. You have lent money to the company
C. You are liable for the company's debts
D. The company will return your original investment to you with interest
E.  Don't know/Not sure

Question

Question 2
If you buy a company's bond...

A. You own part of the company
B. You have lent money to the company
C. You are liable for the company's debts
D. You can vote on shareholder resolutions
E.  Don't know/Not sure

Question

Question 3
In general, if interest rates go down, then bond prices...

A. Go down
B. Go up
C. Are not affected
D. Don't know/Not sure

Question

Question 4
In general, investments that are riskier tend to provide higher returns over time than investments with less risk.

A. True
B.  False
C. You are liable for the company's debts

Question

Question 5
What is a reasonable average annual return that can be expected from a broadly diversified U.S. stock mutual fund over the long run?

A. 5%
B. 10%
C. 15%
D. 20%
E. 25%
F. Don't know/Not sure

Question

Question 6
Over the last 20 years in the U.S., the best average returns have been generated by:

A. Stocks
B. Bonds
C. CDs
D. Money market accounts
E. Don't know/Not sure

Question

Question 7
Which of the following organizations insures you against your losses in the stock market?

A. Federal Deposit Insurance Corporation (FDIC)
B. Financial Industry Regulatory Authority (FINRA)
C. Securities and Exchange Commission (SEC)
D. Securities Investor Protection Corporation (SIPC)
E. None of the above
F. Don't know/Not sure

Question

Question 8
Which is the best definition of "selling short"?

A. Selling shares of a stock shortly after buying it
B. Selling shares of a stock before it has reached its peak
C. Selling shares of a stock at a loss
D. Selling borrowed shares of a stock
E. Don't know/Not sure

Question

Question 9
Hedge funds are subject to the same rules and regulations as mutual funds.

A. True
B. False
C. Don't know/Not sure

Question

Question 10
A Section 529 Plan is a tax-advantage way to save for:

A. College
B. Retirement
C. Long-term health care
D. Don't know/Not sure

Answer

Correct! If you buy a company's stock, you own part of the company.

Stocks are known as "equities" because each stock share represents a small percentage of ownership in the company, entitling the shareholder vote in the election of directors and on other matters taken up at shareholder meetings or by proxy.

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Incorrect. The correct answer is A: If you buy a company's stock, you own part of the company.

Stocks are known as "equities" because each stock share represents a small percentage of ownership in the company, entitling the shareholder vote in the election of directors and on other matters taken up at shareholder meetings or by proxy.

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Incorrect. The correct answer is B: If you buy a company's bond, you have lent money to the company.

Bonds are loans that investors make to a corporation or a government body in exchange for regular interest payments and the return of principal at a future date. Companies issue corporate bonds to raise money for capital expenditures, operations and acquisitions. But unlike stockholders, bondholders don’t receive ownership rights in the corporation.

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Correct! If you buy a company's bond, you have lent money to the company.

Bonds are loans that investors make to a corporation or a government body in exchange for regular interest payments and the return of principal at a future date. Companies issue corporate bonds to raise money for capital expenditures, operations and acquisitions. But unlike stockholders, bondholders don’t receive ownership rights in the corporation.

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Incorrect.

The correct answer is B: when interest rates go down, bond prices go up. Bond prices are negatively correclated, which means when one goes up the other goes down.

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Correct!

If interest rates go down, bond prices go up. Bond prices and interest rates are negatively correlated, which means when one goes up the other goes down.

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Correct! In general, investments that are riskier tend to provide higher returns over time than investments with less risk.

The stock and bond markets tend to reward risk-taking over the long term. This is called the risk-reward tradeoff. Over the short term, however, high-risk investments such as small-company stocks can be extremely volatile. The less willing you are to take that risk, the more you may want to emphasize investments that provide a regular return with less volatility, such as short-term bonds.

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Incorrect. The correct answer is A: True. In general, investments that are riskier tend to provide higher returns over time than investments with less risk.

The stock and bond markets tend to reward risk-taking over the long term. This is called the risk-reward tradeoff. Over the short term, however, high-risk investments such as small-company stocks can be extremely volatile. The less willing you are to take that risk, the more you may want to emphasize investments that provide a regular return with less volatility, such as short-term bonds.

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Correct! Ten percent is a reasonable average annual return that can be expected from a broadly diversified U.S. stock mutual fund over the long run.

Over a long period – such as 20 years or more – the U.S. stock market has historically returned average annualized returns of about 10 percent. However, over a shorter period, the stock market may experience a severe decline in value, including for several years at a time during a “bear” market.

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Incorrect. The correct answer is B: Ten percent is a reasonable average annual return that can be expected from a broadly diversified U.S. stock mutual fund over the long run.

Over a long period – such as 20 years or more – the U.S. stock market has historically returned average annualized returns of about 10 percent. However, over a shorter period, the stock market may experience a severe decline in value, including for several years at a time during a “bear” market.

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Correct! Over the last 20 years in the U.S., the best average returns have been generated by stocks.

The average annualized returns for the U.S. stock market over the last 20 years have outpaced the return of bonds or other “safer” investments. The stock market has historically been the best-performing long-term investment vehicle, although equities can be extremely volatile and the stock market will experience sharp declines over a period of several years at a time.

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Incorrect. The correct answer is A: Over the last 20 years in the U.S., the best average returns have been generated by stocks.

The average annualized returns for the U.S. stock market over the last 20 years have outpaced the return of bonds or other “safer” investments. The stock market has historically been the best-performing long-term investment vehicle, although equities can be extremely volatile and the stock market will experience sharp declines over a period of several years at a time.

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Correct! None of the organizations listed insures you against your losses in the stock market.

When you invest in stocks, you accept the risk that your investment may decline as well as rise in value. A primary role of securities regulators such as FINRA and the SEC is to ensure that securities laws and regulations are followed to punish violators.

The FDIC generally insures checking, savings and other deposit accounts when an FDIC-regulated bank fails. The mission of the SIPC is to return funds and securities to investors if the brokerage firm holding these assets become insolvent.

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Incorrect. The correct answer is D: None of the organizations listed insures you against your losses in the stock market.

When you invest in stocks, you accept the risk that your investment may decline as well as rise in value. A primary role of securities regulators such as FINRA and the SEC is to ensure that securities laws and regulations are followed to punish violators.

The FDIC generally insures checking, savings and other deposit accounts when an FDIC-regulated bank fails. The mission of the SIPC is to return funds and securities to investors if the brokerage firm holding these assets become insolvent.

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Correct! Selling borrowed shares of a stock is the best definition of "selling short."

Short selling involves borrowing stock from a broker though a margin account and selling it, with the understanding that it must later be bought back and returned to the broker. If the stock declines in value, as the short seller hopes, the investor will profit since the value of the stock borrowed and sold would be higher than the stock subsequently purchased and returned to the broker. However, if the stock rises in value, the investor must pay the difference to make good on the stock owed to the broker.

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Incorrect. The correct answer is D: Selling borrowed shares of a stock is the best definition of "selling short."

Short selling involves borrowing stock from a broker though a margin account and selling it, with the understanding that it must later be bought back and returned to the broker. If the stock declines in value, as the short seller hopes, the investor will profit since the value of the stock borrowed and sold would be higher than the stock subsequently purchased and returned to the broker. However, if the stock rises in value, the investor must pay the difference to make good on the stock owed to the broker.

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Correct! Hedge funds are not always subject to the same rules and regulations as mutual funds.

Hedge funds are basically private investment pools. Because they are usually only open to limited numbers of wealthy, financially sophisticated investors and do not advertise or publicly offer their securities, private hedge funds are usually not required to register with the SEC. As a result, unregistered private hedge funds do not provide many of the investor protections that apply to registered investment products, such as mutual funds.

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Incorrect. The correct answer is B: Hedge funds are not always subject to the same rules and regulations as mutual funds.

Hedge funds are basically private investment pools. Because they are usually only open to limited numbers of wealthy, financially sophisticated investors and do not advertise or publicly offer their securities, private hedge funds are usually not required to register with the SEC. As a result, unregistered private hedge funds do not provide many of the investor protections that apply to registered investment products, such as mutual funds.

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Correct! A Section 529 Plan is a tax-advantage way to save for college.

Named after the section of the federal tax code that governs them, Section 529 plans are tax-advantage programs that help families save for college.

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Incorrect. The correct answer is A: A Section 529 Plan is a tax-advantage way to save for college.

Named after the section of the federal tax code that governs them, Section 529 plans are tax-advantage programs that help families save for college.

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