Savings and investments
Answer 10 questions to find out how knowledgeable you are about investments. Do you know what the risk-return relationship is? What does it mean to diversify a portfolio? When is a financial instrument easily liquidated? Test yourself!
The habit of saving regularly is positively correlated with the inclination to plan. Which of the following products is not specifically designed as an instrument for investing your savings?
Investing means:
Correct answer A. Allocating a sum of money to earn a return, i.e. making a profit from it.
Investing means allocating a sum of money in such a way that it can make additional money and generate a profit. Investing is always risky, although not always to the same extent. That's why it's important to always remember the basic rule of investing: the higher the return on an investment, the riskier it is.I've invested €100 in a company that yields 5 per cent at the end of the year. What should I do to find out how much I've earned?
Same conditions as in Question 3: I have invested €100 in a company that yields 5 per cent at the end of the year. Let's add another condition: if the inflation rate in that year was 2 per cent, how much will I have earned?
Which of these types of financial instruments could present the biggest problems if you tried to sell them?
Diversification means investing:
Correct answer D. In several financial products with opposite trends.
Portfolio diversification is achieved in two ways, both of which are necessary: by increasing the number of assets in the portfolio and by investing in low-correlation financial assets/instruments, i.e. whose return doesn't vary (increase or decrease) over time in a similar way when the same event occurs.Which of these statements is true?
Correct answer B. The level of risk depends on the type of bond you purchase.
There are different types of bonds. If you purchase subordinated (or 'junior') bonds, repayment of the principal, in the event of default by the issuer, only occurs after ordinary creditors and holders of other ('senior') bonds have been repaid. In return for the higher risk, the bondholder is nevertheless guaranteed a higher yield. In this respect, subordinated bonds are regarded as an intermediate instrument somewhere between a bond and a share and you need to be particularly skilled to invest in them.An investment with a high return is probably very risky.
To buy or sell listed shares, you must apply…?
What do we mean by a 'long-term time horizon' for financial investments?
Correct answer C. A period of time longer than 5 or 10 years.
When it comes to investments, the time horizon is the length of time for which you are willing to leave your money invested before you can use it. There are no precise definitions, but short term usually means a period of less than two years, medium term means a period of two to five or ten years, and long term means a period of five or ten years or more. For long term, the definition of 'over ten years' is perhaps more useful, because it's only in such long periods that you are likely to see a full financial cycle – i.e. up and down fluctuations, for example, in the stock market – which some authors indicate lasts seven years on average. In general, the longer you hold your investments, the more effectively you will absorb market fluctuations.
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