Basics Beginner: Investments

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1.
When you invest in a bond you are guaranteed to receive your principal back because bonds have a maturity date and fixed term.
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False. Only US government bonds have a guaranteed return of principal if the bond is held to maturity.
2.
Stocks have outperformed every other type of investment because ______.
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Their returns are not fixed. Stocks have unlimited earning capacity.
3.
What is the most commonly used type of cash investment?
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Savings account. A savings account is made up of cash you deposit, but unlike the cash in your pocket, it pays some interest to you.
4.
Compound interest is interest that is calculated only on the principal you invest.
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False. Compound interest is interest that is calculated on the principal you invest plus any interest you earn.
5.
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.
6.
Investment diversification can be accomplished by owning _______.
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Small, mid-sized, and large company stocks. Owning many different-sized companies provides diversification because they have different characteristics and generally perform differently based on the economic and market conditions.