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Quizzes > Quizzes for Business > Finance

Challenge Yourself: Basic Investing Knowledge Quiz

Assess Your Investment Basics with This Quiz

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art illustrating a quiz on basic investing knowledge

Ready to sharpen your investing basics? This Basic Investing Knowledge Quiz offers 15 multiple-choice questions covering essential topics like stocks, bonds, and market dynamics. It's perfect for students, educators, or anyone seeking an investment quiz for self-assessment. Check out our Investing Knowledge Assessment Quiz or try the Sustainable Investing Trivia Quiz for more challenge. Plus, you can customize and reuse this quiz in our quizzes editor to match your teaching style.

What does owning a stock represent?
A loan to the company
Partial ownership in the company
A fixed income instrument
Government guarantee of returns
Owning a stock means holding equity in a company, entitling you to a share of its profits and assets. It is not a debt instrument or guarantee from the government.
What is a bond?
Equity share in a company
Debt security representing a loan to the issuer
Ownership of a fund portfolio
Insurance product
A bond is a debt instrument in which the investor loans money to an entity in exchange for periodic interest payments and return of principal. It is not equity or insurance.
Which of the following best describes a mutual fund?
A single company's stock
A portfolio of assets managed by professionals
A short-term government debt instrument
A way to directly trade currencies
A mutual fund pools money from investors to buy a diversified portfolio of stocks, bonds, or other assets under professional management. It is not a single stock or currency trading tool.
What does a higher potential return generally imply about an investment's risk?
Lower risk
Higher risk
No relation
Guaranteed returns
The risk-return tradeoff states that higher expected returns typically come with higher risk. Guaranteed returns and no relation contradict this fundamental principle.
What is compound interest?
Interest calculated only on original principal
Interest on principal and previously earned interest
A fixed fee for loan issuance
Profit from buying and selling assets
Compound interest means each period's interest is added to the principal and subsequent interest is earned on both. It differs from simple interest, which applies only to the principal.
A portfolio with 60% stocks and 40% bonds is often called what type of allocation?
Aggressive
Conservative
Balanced
Income-focused
A balanced portfolio typically combines equities (around 60%) and bonds (around 40%) to aim for moderate risk and return. Aggressive and conservative allocations differ in equity exposure levels.
If an investment loses 10% of its value and then gains 10%, what is the net percentage change?
0%
-1%
1%
10%
Starting at 100, a 10% loss yields 90, and a 10% gain on 90 yields 99, which is a net 1% loss. It is not zero or a positive gain.
What is the value of $1,000 invested at an annual compound interest rate of 5% after 2 years?
$1,050
$1,100
$1,102.50
$1,200
Compound interest for two years is calculated as 1000×(1.05)^2 = 1102.50. The other amounts reflect simple interest or incorrect compounding.
Compared to stocks, bonds generally offer which of the following?
Higher volatility
Lower risk
Higher expected returns over the long term
Ownership in a company
Bonds are debt securities that pay fixed interest and typically have lower volatility and returns than stocks. They do not confer ownership in the issuer.
Which strategy best illustrates diversification?
Investing all funds in one technology stock
Spreading investments across different asset classes
Timing the market to buy the dip of a single stock
Holding only cash in a savings account
Diversification involves spreading capital across assets (stocks, bonds, commodities) to reduce unsystematic risk. Concentrating in one stock or asset class lacks diversification.
What effect does a lower correlation between assets have on a portfolio?
Enhances diversification and can lower overall risk
No effect on risk
Increases total risk
Reduces diversification benefits
Lower or negative correlation means asset prices move independently or opposite, which enhances diversification benefits and lowers portfolio volatility.
Rebalancing a portfolio typically involves which action?
Ignoring allocation weights
Selling overweight assets and buying underweight assets
Holding assets until they double in value
Buying more of only the best-performing assets
Rebalancing restores target allocation by selling portions of assets that have grown above weight and buying more of those below, maintaining risk-return goals.
What is an index fund?
A fund that actively picks stocks to beat the market
A fund designed to replicate a market index's performance
A high-risk derivative product
A type of hedge fund
An index fund passively tracks a specific market benchmark (like the S&P 500) to match its returns. It does not involve active stock picking or derivatives.
In the risk-return spectrum, what is the risk-free rate?
Return on a diversified equity portfolio
Theoretical return on an investment with zero risk
Average market return over 10 years
The volatility of bond returns
The risk-free rate is the return on an asset assumed to have zero default risk (e.g., short-term government bills). It serves as a baseline in financial models.
Asset A has an expected return of 8% with a risk measure of 5%, and Asset B has an expected return of 12% with a risk measure of 15%. Which has the higher return-to-risk ratio?
Asset A
Asset B
Both equal
Cannot determine
Asset A's return-to-risk ratio is 8/5 = 1.6, while Asset B's is 12/15 = 0.8. A higher ratio indicates better reward per unit of risk.
What is the future value of $1,000 after 3 years at a 5% continuous compounding rate?
About $1,150
About $1,161.83
About $1,200
About $1,300
Continuous compounding uses the formula FV = P×e^(rt). Here FV =1000×e^(0.05×3) ≈1000×1.16183 =1161.83.
Which correlation coefficient between two assets provides the greatest potential diversification benefit?
-1
0
0.5
0.9
A correlation of -1 means assets move perfectly opposite, allowing maximum risk reduction. Positive or zero correlation offers less diversification benefit.
If $100 is invested and earns 10% in the first year and 20% in the second year, what is its value at the end of two years?
$130.00
$132.00
$120.00
$115.00
Sequential compounding yields 100×1.10×1.20 = 132. The other values reflect simple sums or single-year calculations.
According to CAPM, if a stock has a beta of 1.2 and the market falls by 5%, the stock is expected to change by:
-6%
-4%
-5%
+6%
CAPM implies stock returns move with market return times beta: 1.2×(-5%) = -6%. This linear relation describes systematic risk exposure.
In a risk parity portfolio, how are asset weights determined?
Equally by dollar amount
Proportional to each asset's volatility, allocating more weight to lower volatility assets
Only by expected return
Based on market capitalization
Risk parity assigns weights inversely proportional to asset volatility so that each contributes equally to total portfolio risk. Other methods focus on capital or returns.
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Learning Outcomes

  1. Identify core investment types such as stocks, bonds, and funds
  2. Analyze risk and return principles in different scenarios
  3. Evaluate the impact of market fluctuations on portfolios
  4. Apply diversification strategies to minimize investment risk
  5. Demonstrate understanding of compound interest calculations
  6. Master basic techniques for portfolio allocation

Cheat Sheet

  1. Understand Core Investment Types - Think of stocks as slices of a company pie, bonds as IOUs you lend to governments or firms, and mutual funds as party buckets pooling money from many investors. Each option comes with its own flavor of risk and potential reward, so mix and match wisely. ICI Research Overview
  2. Grasp Risk and Return Principles - Higher returns often walk hand-in-hand with higher risk, like riding a roller coaster for that extra thrill. Assess your personal comfort level and financial goals to pick investments that won't keep you up at night. Beginner's Guide to Asset Allocation
  3. Evaluate Market Fluctuations - Markets are mood swings on a grand scale - one day you're up, the next you're down - so staying curious about economic news keeps you ahead of the curve. Regular check-ins help you spot opportunities and dodge nasty surprises. SEC Investor Publications
  4. Apply Diversification Strategies - Don't put all your eggs in one basket: spread investments across stocks, bonds, real estate and more to cushion the fall during rocky times. A diversified portfolio is like a well-balanced meal - nutritious and satisfying. Diversification (Finance) - Wikipedia
  5. Master Compound Interest Calculations - Compound interest is like a snowball rolling downhill: your earnings earn their own earnings, creating exponential growth over time. Get comfortable with the formula A = P(1 + r/n)❿ᵗ to forecast how investments blossom. Investopedia on Compound Interest
  6. Implement Portfolio Allocation Techniques - Decide what slice of your pie goes to stocks versus bonds based on your timeline and nerve. A classic 60/40 split might be your starting point, but tweak it as you learn more. Asset Allocation - Wikipedia
  7. Recognize the Impact of Inflation - Inflation quietly erodes your buying power, so aim for investments that outpace price rises. Over the long haul, stocks and real assets have historically been your best guard against sneaky inflation. Inflation - Investopedia
  8. Understand Liquidity Needs - Liquidity is how fast you can convert investments into cash without breaking a sweat. Stocks are often more liquid than real estate, so plan ahead if you might need quick access to funds. Liquidity - Investopedia
  9. Stay Informed on Tax Implications - Tax rules can nibble away at your profits, with short-term gains taxed at higher rates than long-term ones. Knowing the basics of capital gains and retirement account benefits can save you serious money. IRS Topic 409
  10. Regularly Review and Rebalance - Your dream portfolio might drift over time, so set periodic check-ups to trim winners and boost underdogs, keeping your original game plan intact. Rebalancing helps you lock in gains and manage risk automatically. SEC Rebalancing Guide
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