Strategy Beginner: Asset Allocation and the Investment Time Horizon

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1.
Which of the following investment portfolios is the best example of diversification through asset allocation?
Choose wisely. There is only one correct answer.
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.
2.
Long investment time horizons decrease the risk of volatile investments.
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True. Holding volatile investments for long periods increases the likelihood that long-term growth trends will overcome short-term price fluctuations.
3.
If you are investing for your childs college education, when does your investment time horizon permit you to take the most risk?
Choose wisely. There is only one correct answer.
When your child is born. At this point, you have the longest to invest before you need to cash in on your investments. Your investment time horizon is the longest, thus permitting you to allocate capital to assets that are more volatile.
4.
If you start investing for your newborn childs college education, you should avoid risking your capital in the stock market.
Choose wisely. There is only one correct answer.
False. With a long investment time horizon, more volatile investments like stocks will do the best job of generating growth in value.
5.
A new retiree should shift all of his or her investments to low-risk securities like bonds.
Choose wisely. There is only one correct answer.
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.