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Quizzes > Quizzes for Business > Finance

Investing Knowledge Assessment Quiz

Evaluate Your Investment Skills with This Quiz

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

Use this investing knowledge quiz to check your grasp of core ideas with 15 multiple-choice questions on risk, diversification, and markets. You'll see where you stand so you can spot gaps before you invest or study; if you're new, try the basic quiz, or explore the sustainable investing quiz .

Which of the following investment vehicles is generally considered the least risky?
Government bonds
Cryptocurrencies
Real estate
Corporate stocks
Government bonds typically have lower default risk and are backed by sovereign issuers, making them less volatile. Other assets like stocks and cryptocurrencies carry higher price fluctuation and credit risk.
What does ROI stand for in financial metrics?
Rate of Investment
Return on Income
Ratio of Interest
Return on Investment
ROI stands for Return on Investment, which measures the gain or loss generated relative to the amount of money invested. It is a key metric for comparing the efficiency of different investments.
Portfolio diversification primarily aims to reduce which of the following?
Unsystematic risk
Liquidity
Transaction costs
Systematic risk
Diversification spreads investments across assets to reduce unsystematic risk, which is specific to individual investments. Systematic risk, affecting the entire market, cannot be eliminated by diversification alone.
The price-to-earnings ratio (P/E) is calculated by dividing a company's stock price by its...
Market capitalization
Earnings per share
Dividend yield
Book value
The P/E ratio is defined as stock price divided by earnings per share (EPS). This ratio helps investors assess how much they're paying for each dollar of earnings.
Which term describes the degree of variation in an asset's price over time?
Volatility
Yield
Liquidity
Duration
Volatility measures the extent of price fluctuations of an asset over time. Higher volatility indicates larger and more frequent price swings.
Which investment vehicle pools funds from many investors to purchase a diversified portfolio?
Certificates of deposit
Hedge funds
Individual stocks
Mutual funds
Mutual funds aggregate money from multiple investors to invest in a diversified mix of assets. This structure provides small investors access to professional management and diversification.
Which of the following is a basic risk management strategy that involves setting a predetermined exit price?
Dollar-cost averaging
Stop-loss order
Asset allocation
Hedging
A stop-loss order automatically sells an asset when its price falls to a specified level, limiting potential losses. It is a common tool for managing downside risk.
If you bought a stock at $50 and sold it at $60, what is your simple ROI?
20%
10%
30%
50%
Simple ROI is calculated as (Sell Price - Buy Price) / Buy Price Ã- 100%. In this case, ($60 - $50) / $50 Ã- 100% = 20%.
Two assets with a negative correlation will tend to...
Have identical returns
Eliminate all risk
Move in opposite directions
Move in the same direction
Negative correlation means when one asset's value rises, the other tends to fall. This property is useful in diversification to smooth overall portfolio returns.
A forward P/E ratio differs from a trailing P/E ratio because it uses...
Current book value
Dividend payments
Forecasted earnings
Historical earnings
Forward P/E is based on analysts' projected future earnings rather than past earnings. Trailing P/E uses actual historical EPS data.
In financial markets, a bear market is characterized by...
Stable interest rates
Falling prices
High trading volume only
Rising prices
A bear market involves prolonged declines in asset prices, typically by 20% or more from recent highs. It reflects widespread pessimism among investors.
Which term refers to how easily an asset can be bought or sold without affecting its price?
Risk premium
Liquidity
Beta
Volatility
Liquidity measures an asset's ability to be traded quickly at or near its market value. Highly liquid assets can be converted to cash with minimal price impact.
Among these, which is typically considered the most liquid investment?
Real estate
Money market fund
Fine art
Private equity
Money market funds invest in short-term, high-quality instruments and allow quick redemptions, making them highly liquid. Real estate and private equity are much less liquid.
A high P/E ratio might suggest that a stock is...
Undervalued
Generating no earnings
Risk-free
Overvalued
High P/E ratios imply investors are paying more per dollar of earnings, which may indicate the stock is overvalued relative to its actual earnings.
Value at Risk (VaR) is a metric that estimates...
Price-to-earnings ratio
Minimum guaranteed return
Maximum expected return
Potential loss over a given period at a given confidence level
VaR quantifies the worst expected loss over a set time frame at a specified confidence interval. It is widely used to assess portfolio risk under normal market conditions.
According to the Capital Asset Pricing Model (CAPM), the expected return of an asset equals the risk-free rate plus...
Beta times market risk premium
Asset's standard deviation
Company's debt-to-equity ratio
Dividend yield
CAPM states E(Ri) = Rf + βi Ã- (Rm - Rf), where βi measures sensitivity to market movements and (Rm - Rf) is the market risk premium.
A stock with a beta greater than 1 is generally considered to be...
Less volatile than the market
Uncorrelated with the market
More volatile than the market
Risk-free
Beta measures sensitivity to market movements. A beta above 1 indicates the stock tends to amplify market moves, making it more volatile than the overall market.
The earnings yield is the inverse of which valuation metric?
Debt-to-equity ratio
Price-to-earnings ratio
Price-to-book ratio
Dividend yield
Earnings yield is defined as EPS divided by price, which is the inverse of the P/E ratio (price divided by EPS). It expresses earnings as a percentage of price.
Hedging with derivatives such as options is an example of which risk management principle?
Risk avoidance
Risk transfer
Risk pooling
Risk retention
Using derivatives like options transfers potential losses to the counterparty, effectively shifting risk away from the investor. This is known as risk transfer.
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Learning Outcomes

  1. Analyse different investment vehicles and their risk profiles
  2. Evaluate strategies for portfolio diversification
  3. Identify key financial metrics like ROI and P/E ratio
  4. Apply fundamental risk management principles
  5. Demonstrate understanding of market trends and fluctuations
  6. Master essential investing terminology and concepts

Cheat Sheet

  1. Investment Vehicles - Dive into the world of stocks, bonds, mutual funds and ETFs to discover how each option balances return and risk. Knowing these vehicles is like picking the right ride for your financial journey - some are thrill-seekers, others are smooth cruisers.
  2. Portfolio Diversification - Spread your investments across different assets to avoid roller-coaster swings in your portfolio. It's the classic "don't put all your eggs in one basket" strategy, helping you stay cool when markets get spicy.
  3. Return on Investment (ROI) - Calculate ROI using (Net Profit ÷ Cost of Investment) × 100% to measure how well your money is working for you. It's like grading your own financial report card!
  4. Price-to-Earnings (P/E) Ratio - Use P/E = Market Value per Share ÷ Earnings per Share (EPS) to see how much investors pay for each dollar of profit. A high P/E can mean big growth hopes, while a low one might signal a hidden bargain.
  5. Risk Management - Learn to set stop-loss orders and review your holdings regularly so you're never caught off guard by a market plunge. Think of it as putting on a helmet before the financial roller coaster.
  6. Market Trends - Keep an eye on headlines, charts and key indicators to forecast potential market moves. It's like tuning into a weather report but for your cash - sunny days, storms and all!
  7. Investing Terminology - Master buzzwords like "bull market," "bear market," "liquidity" and "volatility" so you can follow financial chatter like a pro. Clear lingo means clearer decisions.
  8. Asset Allocation - Mix stocks, bonds and cash in proportions that match your goals and comfort zone. It's like crafting a recipe: the right blend makes your portfolio taste just right.
  9. Compound Interest - Watch your money snowball by reinvesting earnings with A = P(1 + r/n)nt. Starting early is your secret superpower for wealth growth!
  10. Efficient Market Hypothesis (EMH) - Explore the idea that markets reflect all available info, making it tough to consistently beat average returns without extra risk. Embrace this concept to set realistic expectations.
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