Choose wisely. There is only one correct answer to each question.
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1.
To successfully outperform the market by timing, Morningstar found that an investor's calls must be right _______.
Two thirds of the time. Because stocks go up more often than they go down and because of the effects of compounding, market-timers can't just get their calls right half the time and outperform. They must be right two thirds of the time. That's a lot.
2.
If a stock mutual fund was very volatile over a 12-month period, which of the following investors most likely comes out ahead?
The dollar-cost-averaging investor. The dollar-cost-averaging investor has probably accumulated more shares than either the timer or the lump-sum investor and had some uninvested cash on hand when the lump-sum investor was losing money.
3.
Which of the following statements is false?
Dollar-cost averaging always leads to better returns than lump-sum investing. In a rising market, a lump-sum investor will earn more than someone who is dollar-cost averaging into a fund will. However, dollar-cost averaging limits risk, instills discipline, and often allows investors to get into high-minimum funds for less.
4.
If a mutual fund's value increases every month for a 12-month period, which of the following investors most likely comes out ahead?
The lump-sum investor. With a lump-sum investment you would have purchased the most shares at the lowest net asset value--right at the beginning of the period.
5.
Dollar-cost averaging means _______.
Investing a set amount of money on a regular basis. It's an effective method of investing because it buys more shares when the price declines and fewer when the price rises.
