Basics Beginner: Investments

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1.
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.
2.
In mutual funds, a sales charge is used to compensate the mutual fund manager.
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False. It is to compensate the financial advisor for providing advice. The expense ratio is what compensates the mutual fund manager.
3.
When inflation occurs, it means a dollar in the future will be worth more than a dollar today.
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False. Inflation causes the price of products and services to go up over time, so a dollar today will not buy the same amount of products and services in the future.
4.
Investors with a long-term goal like retirement in 20 or more years who are willing to live with significant declines in the short run often choose to allocate a higher percentage of their investment dollars to ________.
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Stocks. Stocks have historically returned much higher returns than bonds and cash for long-term investors; however, the investor must be willing to live with significant declines in stock values over the short term and the potential of losing money.
5.
One of the risks of investing in bonds is interest rate risk. This means that if interest rates rise, your bond will be earning less than new bonds.
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True. This is one risk of investing in bonds.
6.
What results when you sell an investment for more than you paid for it?
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A capital gain. It can be thought of as a gain on the capital invested.