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1.
Short investment time horizons increase the risk of volatile investments.
True. Holding volatile investments for short periods increases the risk that your investment may not recover from a short-term price drop.
2.
Which of the following investment portfolios is the best example of diversification through asset allocation?
Stocks, bonds, and cash (e.g., certificates of deposit). Unlike the other choices, these all represent different asset classes -- asset allocation consists of building a portfolio of different asset classes.
3.
If you start investing for your newborn childs college education, you should avoid risking your capital in the stock market.
False. With a long investment time horizon, more volatile investments like stocks will do the best job of generating growth in value.
4.
Your child is about to enter college. Which portfolio is likely to be the most successful for your college-fund investments?
20 percent stocks, 60 percent bonds, 20 percent cash. With a short investment time horizon, youll probably want to have most of your funds invested in less-volatile instruments like bonds.
5.
A new retiree should shift all of his or her investments to low-risk securities like bonds.
False. New retirees may still have an investment time horizon of 20 years or more, which allows them to take advantage of some exposure in the stock market.
