1. In general, investments that are riskier tend to provide higher returns over time than investments with less risk.
True
False
Don’t know
2. If you buy a company’s stock…
You own a part of the company
You have lent money to the company
You are liable for the comphacany’s debts
The company will return your original investment to you with interest
Don’t know
3. If you buy a company’s bond…
You own a part of the company
You have lent money to the company
You are liable for the company’s debts
You can vote on shareholder resolutions
Don’t know
4. Over the last 20 years in the U.S., the best average returns have been generated by:
Stocks
Bonds
CDs
Money market accounts
Precious metals
Don’t know
5. If a company files for bankruptcy, which of the following securities is most at risk of becoming virtually worthless?
The company’s preferred stock
The company’s common stock
The company’s bonds
Don’t know
6. Which of the following best explains why many municipal bonds pay lower yields than other
government bonds?
Municipal bonds are lower risk
There is a greater demand for municipal bonds
Municipal bonds can be tax-free
Don’t know
7. What has been the approximate average annual return of the S&P 500 stock index over the past 20 years (not adjusted for inflation)?
-10%
-5%
5%
10%
15%
20%
Don’t know
8. You invest $500 to buy $1,000 worth of stock on margin. The value of the stock drops by 50%. You
sell it. Approximately how much of your original $500 investment are you left with in the end?
$500
$250
$0
Don’t know
9. Which is the best definition of ‘selling short?’
Selling shares of a stock shortly after buying it
Selling shares of a stock before it has reached its peak
Selling shares of a stock at a loss
Selling borrowed shares of a stock
Don’t know
10. Which of the following best explains the distinction between nominal returns and real
returns?
Nominal returns are pre-tax returns; real returns are after-tax returns
Nominal returns are what an investment is expected to earn; real returns are what an investment actually earns
Nominal returns are not adjusted for inflation; real returns are adjusted for Inflation
Nominal returns are not adjusted for fees and expenses; real returns are adjusted for fees and expenses
Don’t know
Answers to Investor Literacy Self-Test
Question 1: Concept of tradeoff between return and risk
Correct answer “True”: 76%
Question 2: Concept of share ownership
Correct answer” You own a part of the company”: 73%
Question 3: Concept of bonds
Correct answer “You have lent money to the company”: 65%
Question 4: Concept of returns from long-term investing
Correct answer “Stocks”: 55%
Question 5: Concept of priority of payment in corporate bankruptcy
Correct answer “The company’s common stock”: 53%
Question 6: Concept of tax-exemption on bonds issued by municipal agencies
Correct answer “Municipal bonds can be tax-free”: 34%
Question 7: Estimate of earnings of stock market over 20 years
Correct answer “10%”: 26%
Question 8: Concept of leverage of buying stock on margin
Correct answer “$0”: 23%
Question 9: Concept of selling short.
Correct answer “Selling borrowed shares of a stock”: 21%
Question 10: Concept of impact of inflation (not projected versus actual earnings)
Correct answer “Nominal returns are not adjusted for inflation; real returns are adjusted for Inflation”: 12%