Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
Market timing means investing your money only when you sense that the time is right.
True. Market timing is difficult to do.
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.
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.
