See if you can answer the below questions in under five minutes! Except for the bonus question that we just had to include, the questions that follow are from a recent survey conducted by State Street Center for Applied Research and State Street Global Advisors Practice Management. The average investor surveyed scored a 61% (3 out of 5 questions answered correctly). We know you can do better!
1. Select the correct definition for “bond.”
A. A loan of money to an entity (e.g. company or government) that is designed to appreciate over time as the entity proves its financial security.
B. A loan of money to an entity (e.g. company or government) that borrows the funds for a defined period of time, usually at a fixed interest rate.
2. True or False: An active fund/investment product is one that tries to beat a benchmark and a passive fund/investment product is one that tries to mimic a benchmark.
3. Suppose you had $100 in a savings account and the interest rate was 2% per year. At the end of each year, the interest earned is deposited into the savings account. After 5 years, how much do you think you would have in the account if you left the money to grow?
A. More than $110
B. Exactly $110
C. Less than $110
4. Select the correct definition for “mutual fund.”
A. A fund comprised of a variety of assets intended to provide financial security to an individual, typically once the individual reaches a certain age.
B. A pool of funds collected from many investors for the purpose of investing in stocks, bonds, money market instruments and similar assets. Each investor retains ownership of his or her portion of the overall investment.
BONUS: Which investment would you rather own?
A. Earns 10% in the first year, loses 8% the second year and earns 8% the following year.
B. Earns 8% in the first year, loses 5% in the second year and earns 8% the following year.