#1
What is the primary goal of diversification in investment?
To spread risk across different assets
ExplanationMitigating risk by investing in a variety of assets.
#2
What is the function of a stop-loss order in investing?
To limit losses by automatically selling an asset when its price falls below a specified level
ExplanationProtecting against losses by selling an asset if its price drops to a predefined level.
#3
What is the purpose of the Securities and Exchange Commission (SEC) in the United States?
To regulate and oversee the securities industry
ExplanationEnforcing regulations to protect investors and maintain fair and efficient markets.
#4
What is the significance of the P/E ratio (Price-to-Earnings ratio) in stock analysis?
It reflects the relationship between a stock's price and its earnings per share
ExplanationAssessing a stock's valuation relative to its earnings, indicating potential over or undervaluation.
#5
What is the purpose of a 401(k) plan in the United States?
To offer a tax-advantaged retirement savings plan for employees
ExplanationTax-efficient retirement savings vehicle offered by employers.
#6
Which financial instrument represents ownership in a company?
Stocks
ExplanationOwnership shares in a company's assets and profits.
#7
What is the role of a stockbroker in financial markets?
To buy and sell securities on behalf of clients
ExplanationExecuting trades on behalf of clients in financial markets.
#8
What does the term 'bull market' refer to in financial markets?
A market where prices are rising or expected to rise
ExplanationA period of increasing prices, often driven by optimism and investor confidence.
#9
What is the purpose of the Federal Reserve (Fed) in the United States?
To conduct monetary policy and ensure economic stability
ExplanationRegulating the money supply and interest rates to stabilize the economy.
#10
What does the term 'asset allocation' refer to in investment strategy?
The distribution of investments across different asset classes
ExplanationBalancing investments across various asset types to manage risk and return.
#11
What is the significance of the Dow Jones Industrial Average (DJIA) in financial markets?
It tracks the performance of 30 large, publicly-owned companies
ExplanationA widely followed stock market index reflecting the performance of key companies.
#12
What is the Efficient Market Hypothesis (EMH) suggesting about stock prices?
Stock prices fully reflect all available information
ExplanationPrices of stocks reflect all public information, making it hard to outperform the market.
#13
What does the term 'Compound Annual Growth Rate (CAGR)' measure?
The average annual growth rate of an investment over time
ExplanationA measure of investment growth rate over multiple periods, accounting for compounding.
#14
What is the concept of 'beta' in the context of investments?
The measure of an asset's risk in relation to the overall market
ExplanationAssessing an asset's volatility in comparison to the broader market.
#15
In options trading, what does it mean to 'write' a call option?
To sell a call option
ExplanationSelling the right to buy an asset at a predetermined price.
#16
What does the term 'leverage' mean in the context of investing?
The use of borrowed funds to increase the size of an investment
ExplanationAmplifying potential returns or losses by using borrowed capital.
#17
What is the key difference between a limit order and a market order in trading?
A limit order specifies a maximum price, while a market order executes at the current market price
ExplanationLimit orders set specific price targets, while market orders execute immediately at prevailing prices.