Introduction to Investing

Show your work for each problem.

1.
What is the main difference between saving and investing?
1. a)There is no difference
2. b)Investing has higher potential returns but more risk
3. c)Saving always makes more money
4. d)Investing is only for wealthy people
Answer: Investing has higher potential returns but more risk
Investing offers higher potential returns (5-10%) compared to savings (1-3%), but comes with the risk of losing money. This is the fundamental trade-off.
2.
What does diversification mean in investing?
1. a)Checking your investments daily
2. b)Only investing in bonds
3. c)Putting all money in one stock
4. d)Spreading money across many investments to reduce risk
Answer: Spreading money across many investments to reduce risk
Diversification means spreading your money across different investments. If one fails, you don't lose everything. It's like not putting all your eggs in one basket.
3.
If you invest 100 dollars and earn 10% return, how many dollars do you earn?
Answer: 10
10% of 100 = . You earn 10 dollars on your 100 dollar investment.
4.
What is the total value after investing 500 dollars at 8% for one year? Round to the nearest whole number.
Answer: 540
. After one year, your 500 dollars grows to 540 dollars.
5.
Why is starting to invest early more important than investing a lot?
1. a)It's not - investing more is always better
2. b)Stocks are cheaper when you're young
3. c)Banks give better rates to young people
4. d)Compound growth gives more time for earnings to multiply
Answer: Compound growth gives more time for earnings to multiply
Compound growth means your earnings generate their own earnings. More time means more cycles of growth, so even small amounts invested early can outgrow larger amounts invested later.
6.
You invest 1000 dollars at 5% annual return. What is the value after 2 years using compound growth? Round to the nearest whole number.
Answer: 1103
. Your investment grows to about 1103 dollars.
7.
You have 2000 dollars. You put 70% in stocks (10% return) and 30% in bonds (4% return). What is your total after one year?
Answer: 2164
1. How much money goes into stocks? (2000 times 0.70) 1400
2. How much money goes into bonds? (2000 times 0.30) 600
3. What are the stocks worth after 1 year? (1400 times 1.10) 1540
4. What are the bonds worth after 1 year? (600 times 1.04) 624
5. What is the total portfolio value? 2164
8.
Which investment typically has higher returns but also higher risk?
1. a)Bonds
2. b)Savings accounts
3. c)All have the same risk
4. d)Stocks
Answer: Stocks
Stocks represent ownership in companies and their value can change significantly. They offer average returns of 8-10% but can lose value. Bonds are loans that pay steady interest (3-5%) with less risk.
9.
You invest 200 dollars per month for 12 months. How much did you invest in total, and what is it worth at the end if you earned 6% overall?
Answer: 2544
1. How much do you invest each month? 200
2. How many months do you invest? 12
3. What is the total invested? (200 times 12) 2400
4. What is 6% of 2400? 144
5. What is the final value? (2400 plus earnings) 2544
10.
You invest 5000 dollars at 8% annual return. What is the value after 3 years using compound growth? Round to the nearest whole number.
Answer: 6299
. Your investment grows by nearly 1300 dollars in 3 years.
11.
Person A invests 3000 dollars at age 25. Person B invests 3000 dollars at age 35. Both earn 7% annually. How much more does Person A have at age 55?
Answer: 11231
1. How many years does Person A invest? (55 minus 25) 30
2. How many years does Person B invest? (55 minus 35) 20
3. What is Person A's value? Round 3000 times 1.07^30 to nearest whole 22840
4. What is Person B's value? Round 3000 times 1.07^20 to nearest whole 11609
5. How much more does A have? (A minus B) 11231
12.
What does the Rule of 72 help you estimate?
1. a)The minimum amount to invest
2. b)How long it takes for your money to double
3. c)The best stocks to buy
4. d)Your tax rate on investments
Answer: How long it takes for your money to double
The Rule of 72: Divide 72 by your annual return rate to estimate doubling time. Example: At 8% return, your money doubles in about years.
13.
Using the Rule of 72, approximately how many years will it take for money to double at 6% annual return?
Answer: 12
years. At 6% annual return, your investment will approximately double in 12 years.
14.
Your company matches 100% of your retirement contributions up to 5% of salary. You earn 60000 dollars. If you contribute 5%, what is the total going into your retirement account per year?
Answer: 6000
1. What is your annual salary? 60000
2. What percentage do you contribute? 5
3. What is 5% of 60000? (Your contribution) 3000
4. The company matches 100%. What is the match amount? 3000
5. What is the total annual contribution? 6000
15.
What is a portfolio in investing?
1. a)A bank fee
2. b)Your collection of all investments
3. c)A type of stock
4. d)A savings account
Answer: Your collection of all investments
A portfolio is your complete collection of investments - stocks, bonds, funds, and any other assets you own. Diversifying your portfolio reduces risk.