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GXIQ Quiz - Answer Keys

15 true-or-false statements on investing fundamentals. The correct answer for each question is highlighted below, with the actual answer explained wherever the statement is false.

Question 1 of 15 The ASX 200 is an index that tracks the performance of the 200 largest companies listed on the Australian Securities Exchange by market capitalisation. TrueCorrect False Don't know Question 2 of 15 Investing in a single company's shares is usually less risky than investing in a diversified share portfolio. True FalseCorrect Don't know The actual answerIt's the opposite. A single company's shares carry concentration risk. If that one business struggles, your whole investment does. A diversified portfolio spreads money across many companies, so one poor performer has far less impact on your overall returns. Question 3 of 15 Liquidity risk is the danger of being unable to convert an investment into cash quickly when you need it. TrueCorrect False Don't know Question 4 of 15 Compound interest is when you earn interest only on the original amount you invested, not on any interest already earned. True FalseCorrect Don't know The actual answerCompound interest is interest earned on both the original amount and the interest already earned, or "interest on interest". Earning interest only on the original amount describes simple interest. Question 5 of 15 Borrowing to invest (using leverage) increases both the potential gains and the potential losses from an investment. TrueCorrect False Don't know Question 6 of 15 Franking credits pass on the tax a company has already paid, helping Australian investors avoid being taxed twice on the same dividend profit. TrueCorrect False Don't know Question 7 of 15 Simple interest will give you a greater return over a 3 year period than compound interest, assuming the same interest rate and no withdrawals. True FalseCorrect Don't know The actual answerCompound interest gives the greater return. Each year's interest is added to the balance and earns interest itself, so the balance grows faster than with simple interest, which only ever pays on the original amount. Question 8 of 15 In general, investment earnings inside superannuation are taxed at the same rate as the same earnings held in your own name. True FalseCorrect Don't know The actual answerEarnings inside superannuation are taxed concessionally, generally up to 15% in the accumulation phase (10% on capital gains for assets held over 12 months), and typically 0% in the retirement (pension) phase. That is usually well below the marginal tax rate you'd pay on the same earnings held in your own name. Question 9 of 15 A higher yield on a bond always means it is a safer investment. True FalseCorrect Don't know The actual answerA higher yield usually signals higher risk, not lower. Investors demand a greater return to compensate for a higher chance the issuer can't repay. Safer bonds, such as government bonds, generally pay lower yields. Question 10 of 15 Capital gains tax (CGT) is a tax you pay when you receive dividends from shares. True FalseCorrect Don't know The actual answerCapital gains tax applies to the profit you make when you sell (or otherwise dispose of) an investment for more than you paid. Dividends are taxed as ordinary income in the year you receive them, not as capital gains. Question 11 of 15 Brokerage costs are a fixed monthly fee you pay to a broker or platform, and do not change based on how often you buy or sell investments. True FalseCorrect Don't know The actual answerBrokerage is typically charged per trade, either a flat fee or a percentage of the transaction, so the more often you buy or sell, the more brokerage you pay. It is not a fixed monthly fee. Question 12 of 15 Dollar cost averaging (DCA) is when you invest the same amount of money at regular intervals, regardless of whether markets are up or down. TrueCorrect False Don't know Question 13 of 15 The management expense ratio (MER) is an ongoing annual fee charged by a fund or ETF as a percentage of the amount you have invested. TrueCorrect False Don't know Question 14 of 15 Hedging is when you use investments to increase your exposure to market movements so you can get higher returns. True FalseCorrect Don't know The actual answerHedging is the opposite. It uses investments to reduce your exposure to market movements and protect against losses, usually at the cost of some potential upside. Increasing exposure to chase higher returns is closer to leverage or speculation. Question 15 of 15 A market capitalisation weighted index gives the largest weighting to the companies with the highest share prices, rather than total company value. True FalseCorrect Don't know The actual answerA market capitalisation weighted index weights companies by their total company value (share price multiplied by the number of shares on issue), not by share price alone. A company with a low share price but many shares can still carry a large weighting.