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Quizzes > Quizzes for Business > Finance

Basic Investment Knowledge Quiz Challenge

Test Your Understanding of Investment Fundamentals

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art depicting elements related to Basic Investment Knowledge Quiz.

This Basic Investment Knowledge Quiz helps you learn and check core investing basics like asset classes, risk, and simple portfolio moves. Answer 15 quick multiple-choice questions to spot gaps and build confidence before you invest. For more practice, try the investment products quiz or the broader basics quiz .

What is diversification in investing?
Buying assets only when prices are rising
Investing only in high-return assets
Combining a variety of assets to reduce overall risk
Focusing on one industry for higher returns
Diversification involves holding different assets so that poor performance in one can be offset by better performance in others. This strategy reduces the overall portfolio risk.
Which asset class is typically considered fixed-income?
Real estate
Bonds
Stocks
Commodities
Fixed-income assets provide regular interest payments and return of principal, which is characteristic of bonds. Stocks and commodities do not guarantee fixed periodic payments.
In investing, risk is best described as:
Only concerned with losing money
Guaranteed loss of principal
The variability of returns around the expected outcome
The total time an investment is held
Risk refers to the uncertainty or variability in investment returns, meaning outcomes can differ from expectations. It is not only about losses but about the range of possible outcomes.
Which asset class historically offers the highest potential long-term returns?
Equities (stocks)
Cash equivalents
Government bonds
Real estate
Over the long term, equities have exhibited higher average returns compared to bonds and cash due to the higher risk premium associated with owning businesses. Real estate returns are competitive but generally lag behind equities.
Liquidity refers to:
The potential return on an investment
The ease of converting an asset into cash without significant loss
The diversification level of a portfolio
The long-term growth rate of an asset
Liquidity measures how quickly and easily an asset can be sold for cash at or near its market value. Highly liquid assets can be converted without a substantial price concession.
What is the formula for calculating expected return of an investment with multiple possible outcomes?
Σ (Probability of outcome - Return of outcome)
Standard deviation of past returns
(Current price - Dividend yield)
(Max return - Min return) / 2
Expected return is calculated as the weighted average of all possible returns, where each outcome is weighted by its probability. This captures the central tendency of uncertain returns.
Suppose an investment has a 50% chance of returning 4% and a 50% chance of returning 8%. What is its expected return?
8%
4%
6%
5%
The expected return is (0.5 - 4%) + (0.5 - 8%) = 2% + 4% = 6%. Probabilities multiply each outcome before summing.
A portfolio contains 60% stocks with expected return of 10% and 40% bonds with expected return of 4%. What is the portfolio's expected return?
6.4%
8.0%
10.0%
7.6%
Portfolio expected return is the weighted average: (0.6 - 10%) + (0.4 - 4%) = 6% + 1.6% = 7.6%. Each asset's return is scaled by its portfolio weight.
A beta of 1.2 indicates:
The asset is risk-free
The asset has no systematic risk
The asset is less volatile than the market
The asset is 20% more volatile than the market
Beta measures systematic risk relative to the market. A beta of 1.2 implies expected movement 20% greater than market moves, indicating higher volatility.
How does a negative correlation between two assets affect portfolio risk?
It increases the portfolio's overall risk
It helps reduce the portfolio's overall risk
It guarantees a positive return
It has no effect on portfolio risk
Negative correlation means assets tend to move in opposite directions, which smooths out returns and lowers total portfolio risk when combined.
The P/E ratio is commonly used to measure:
The liquidity of a stock
The debt level of a company
The historical volatility of a stock
The valuation of a company's stock relative to its earnings
Price-to-earnings (P/E) ratio compares share price to per-share earnings, indicating how much investors are willing to pay for each dollar of earnings. It is a standard valuation metric.
Yield to maturity on a bond represents:
The total return expected if held to maturity, accounting for price and coupon
The bond's credit rating
The bond's duration
The bond's coupon rate
Yield to maturity is the internal rate of return earned by an investor who buys the bond and holds it until maturity, incorporating both coupon payments and any gain or loss at redemption.
Among these, which asset class is generally considered least correlated with U.S. equity markets?
High-yield bonds
Large-cap stocks
Corporate bonds
Government bonds
Government bonds, especially U.S. Treasuries, often have lower correlation with equities because they are influenced by different economic factors and serve as a flight-to-quality asset.
Which strategy primarily helps eliminate unsystematic risk?
Market timing
Investing only in government bonds
Diversification across many securities
Holding a single blue-chip stock
Unsystematic risk is company- or industry-specific risk. Diversifying holdings across different securities reduces exposure to any single entity's adverse events.
Standard deviation of returns measures:
The variability of returns around the mean
The average return of an investment
The risk-free rate
The maximum possible loss
Standard deviation quantifies how much returns deviate from the average return, which is a common measure of investment risk. Higher deviation means greater dispersion of outcomes.
According to the Capital Asset Pricing Model (CAPM), what is the expected return of an asset with a beta of 1.5, if the risk-free rate is 2% and the expected market return is 8%?
12%
11%
10%
9%
CAPM states E(R) = Rf + β - (Rm ' Rf). Here, E(R) = 2% + 1.5 - (8% ' 2%) = 2% + 9% = 11%. This incorporates systematic risk via beta.
The Sharpe ratio is best described as:
The excess return of a portfolio per unit of standard deviation
The ratio of a bond's yield to maturity over its price
The total return divided by beta
The portfolio's return relative to the market index
The Sharpe ratio measures how much excess return is achieved for each unit of total risk (standard deviation). It is a primary metric for risk-adjusted performance.
An inverted yield curve, where short-term rates exceed long-term rates, is often interpreted as:
A signal of rising corporate earnings
An indicator of a strong bull market
A sign of high inflation expectations
A predictor of an economic recession
An inverted yield curve has historically preceded recessions because long-term yields fall below short-term yields when investors expect economic slowdown. It reflects future rate expectations.
For a two-asset portfolio with weights of 40% in Asset A (σ=10%) and 60% in Asset B (σ=20%) and a correlation of 0.5, what is the portfolio variance?
0.0256
0.0360
0.0180
0.0160
Variance = wA²σA² + wB²σB² + 2wAwBσAσBϝ = 0.0016 + 0.0144 + 0.0096 = 0.0256. This aggregates individual risks and their interaction.
In portfolio theory, the efficient frontier represents:
The historical performance of market indexes
Portfolios that offer the highest expected return for a given level of risk
All possible combinations of risk-free and risky assets
Portfolios with the maximum diversification benefit
The efficient frontier is the set of optimal portfolios that maximize expected return for each level of risk. Portfolios below the frontier are suboptimal.
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Learning Outcomes

  1. Analyze the core principles of basic investing
  2. Identify common asset classes and their characteristics
  3. Evaluate risk and return trade-offs in investment choices
  4. Demonstrate knowledge of portfolio diversification strategies
  5. Apply foundational calculations for expected returns
  6. Interpret market indicators for informed decision-making

Cheat Sheet

  1. Understand the Core Principles of Investing - Dive into the heart of investing and learn how risk versus return, diversification, and time horizon shape your financial journey. These basics will guide you to make smarter money moves and build confidence as you craft your first portfolio.
  2. Identify Common Asset Classes and Their Characteristics - Jump into the world of stocks, bonds, and cash equivalents and discover what makes each unique. Knowing their features helps you mix and match assets like a pro to suit your goals and appetite for risk.
  3. Evaluate Risk and Return Trade-Offs - Get hands-on with risk and reward by exploring how potential gains line up with possible downsides. Understanding this relationship is key to picking investments that match your financial dreams and stress levels.
  4. Master Portfolio Diversification Strategies - Spread your eggs across multiple baskets by diving into the magic of diversification. Learning these strategies helps cool down volatility and keeps your portfolio smoother when markets get bumpy.
  5. Apply Foundational Calculations for Expected Returns - Crunch numbers to forecast your investment's future growth using historical data. These calculations shine a light on what you might earn and shape smarter choices for your portfolio plan.
  6. Interpret Market Indicators for Informed Decision-Making - Become a market detective by learning key indicators that hint at economic health and investment seasonality. Reading these signals helps you catch the right waves and surf toward your financial goals.
  7. Explore Modern Portfolio Theory (MPT) - Step into MPT to learn how to balance risk and reward through optimized diversification. This powerful framework guides you in building a portfolio that aims for maximum return for a given level of risk.
  8. Learn the Importance of Asset Allocation - Mix different asset categories like a financial chef, balancing stocks, bonds, and more to spice up your portfolio. A well-crafted allocation is your recipe for long-term growth and risk management.
  9. Understand the Role of Rebalancing - Keep your portfolio on target by regularly adjusting your asset mix back to your ideal recipe. Rebalancing helps you lock in gains, manage risk, and maintain discipline through all market moods.
  10. Recognize the Impact of Time Horizon on Investments - Think of time horizon as your investing time machine - longer journeys can handle bumps, shorter ones need gentler roads. Matching your time frame to your goals ensures you choose investments that fit your patience and plans.
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