Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
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.
3.
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.
4.
Why might dollar-cost averaging be useful if you are trying to get into a mutual fund with a $5,000 minimum initial investment and you don't have anything near that amount?
The fund might waive its minimum initial investment requirement if you agree to set up an automatic investment plan and invest a little each month or quarter. Many funds will give you this option.
5.
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.
