NAB Investment Basics 1 — Questions and Answers
Question 1: What is the difference between stocks and bonds?
- Stocks represent ownership in a company; bonds are loans to a company or government (Correct answer)
- Stocks are safer than bonds
- Bonds give you ownership rights
- There is no difference
Correct answer: Stocks represent ownership in a company; bonds are loans to a company or government
Stocks give shareholders partial ownership and potential dividends, while bonds are debt instruments where you lend money in exchange for regular interest payments.
Question 2: What is diversification in investing?
- Spreading investments across different asset types to reduce risk (Correct answer)
- Investing all money in one stock
- Only investing in bonds
- Keeping all money in a savings account
Correct answer: Spreading investments across different asset types to reduce risk
Diversification reduces portfolio risk by spreading investments across different asset classes, industries, and geographies so poor performance in one area does not devastate the entire portfolio.
Question 3: What is a mutual fund?
- A pooled investment vehicle where many investors' money is combined and managed by a professional (Correct answer)
- A personal savings account
- A government bond
- A type of insurance
Correct answer: A pooled investment vehicle where many investors' money is combined and managed by a professional
Mutual funds pool money from many investors to purchase a diversified portfolio of securities, managed by professional fund managers.
Question 4: What does ROI stand for and what does it measure?
- Return on Investment — the gain or loss relative to the amount invested (Correct answer)
- Rate of Interest
- Revenue of Income
- Risk of Investment
Correct answer: Return on Investment — the gain or loss relative to the amount invested
ROI measures the profitability of an investment by comparing the net gain to the original cost, expressed as a percentage.
Question 5: What is a 401(k) retirement plan?
- An employer-sponsored retirement savings plan with tax advantages (Correct answer)
- A type of savings account for children
- A government pension program
- A short-term investment vehicle
Correct answer: An employer-sponsored retirement savings plan with tax advantages
A 401(k) allows employees to save for retirement with pre-tax dollars, often with employer matching contributions, and tax-deferred growth.
Question 6: What is inflation and how does it affect investments?
- A general increase in prices that reduces purchasing power over time (Correct answer)
- A decrease in prices
- A type of tax
- Only affects international markets
Correct answer: A general increase in prices that reduces purchasing power over time
Inflation erodes the purchasing power of money over time, meaning investments must earn returns above inflation to maintain real value.
NAB Investment Basics 1
What is the difference between stocks and bonds?