Basics Beginner: Investments

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1.
As a general rule, which type of investment earns the highest rates?
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Stocks. As a rule, stocks earn the highest rates because their returns are not fixed. Of course, they also have the highest risks.
2.
What does diversification do for a mutual fund?
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Spread risk. By spreading risk among many different securities in a fund, you can reduce the damage that a downturn in a few of them can cause.
3.
The primary risk associated with cash investments is _______.
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Inflation. Cash investments provide safety of principal and liquidity. But because of this, they offer a very low rate of return, often lower than the rate of inflation.
4.
What are some reasons why people invest their money?
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All of the above. These -- and many others -- are the most common reasons people invest their money.
5.
When a bond matures, what happens to it?
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The money gets paid back to you. When a bond matures (that is, when its term ends), the money in it gets paid back to you, along with any interest that is yet due.
6.
Asset allocation is associated with determining how many stocks you will hold in your stock portfolio.
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False. Asset allocation is associated with determining how much you will allocate to an asset class like stocks, bonds, and cash. The number and types of stocks you have in your portfolio has to do with diversification.