Understanding Index Funds
What is an index fund?
A) A type of stock
B) A type of mutual fund or exchange-traded fund that seeks to track the returns of a market index
C) A type of bond
D) An investment in a single security
E) A type of derivative
Correct answer: B
The Origins of Index Funds
Who is credited with creating the first index fund?
A) Edward Renshaw
B) Paul Feldstein
C) Jeremy Grantham
D) Dean LeBaron
E) John Bogle
Correct answer: E
The Benefits of Index Fund Investing
What is one advantage of investing in index funds?
A) They provide instant diversification
B) They have high fees
C) They generate more taxable income
D) They are considered high risk
E) They have no potential for long-term growth
Correct answer: A
The Drawbacks of Index Fund Investing
What is the main disadvantage of investing in index funds?
A) Lack of flexibility
B) Concentration risk
C) No choice in the index fund's composition
D) Inability to beat the market
E) Lack of downside protection
Correct answer: E
The S&P 500 Index
What is the S&P 500 Index and how is it commonly used in the US stock market?
A) It represents stock values from just 30 of the nation's publicly traded companies
B) It includes 100% of the total stocks traded in the United States
C) It is a bond index used to evaluate the performance of the bond market
D) It is one of the world's best-known indexes and includes 80% of the total stocks traded in the United States
E) None of the above
Correct answer: D
Index Funds versus Actively Managed Funds
What is a key difference between index funds and actively managed funds?
A) Index funds are designed to beat market returns
B) Actively managed funds invest only in S&P 500-listed companies
C) Performance of actively managed funds is more predictable
D) Actively managed funds have lower fees than index funds
E) Actively managed funds invest in a changing list of securities chosen by a professional money manager
Correct answer: E
Examining Expense Ratios
What is the expense ratio of an index fund?
A) 0.02%
B) 0.12%
C) 0.5%
D) 1.5%
E) 0.37%
Correct answer: B
Minimum Investments for Index Funds
What is the minimum investment required to invest in most index funds?
A) Always a few thousand dollars
B) Nothing, investors can buy in with no minimum
C) Only for ETFs, there is no minimum investment amount
D) Only for true index funds, there is a higher minimum investment amount
E) It varies depending on the fund and the brokerage
Correct answer: E
Historical Returns of the S&P 500
What is the historical average return of the S&P 500 index?
A) 5% per year
B) 8% per year
C) 10% per year
D) 12% per year
E) None of the above
Correct answer: C
Total Market versus Sector-Specific Index Funds
What is the main difference between a total market index fund and a sector-specific index fund?
A) A total market index fund invests in a wide range of companies across different sectors, while a sector-specific index fund concentrates on a specific industry or market.
B) A total market index fund seeks to track the returns of a specific sector, while a sector-specific index fund seeks to replicate the performance of a market index.
C) A total market index fund is an actively managed fund, while a sector-specific index fund is a passive investment.
D) A total market index fund provides immediate diversification, while a sector-specific index fund requires multiple purchases to diversify.
E) None of the above.
Correct answer: A
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