Investments
The Investments domain tests fundamental analysis of risk, return, diversification, fees, and common investment vehicles. Questions favor concepts over stock-picking: asset allocation, compounding, fund costs, and the relationship between risk and expected return.
Risk, return, and allocation
Investors demand higher expected returns for accepting more risk, but higher expected return is not guaranteed. Stocks have historically been more volatile than bonds; cash-like investments have lower volatility and lower expected return. Time horizon matters: short-term goals generally need stable value, while long-term goals can tolerate more volatility. Diversification spreads money across assets whose returns do not move perfectly together, reducing unsystematic risk. Asset allocation is the mix of stocks, bonds, and cash. Rebalancing restores the target mix.
Vehicles and costs
Mutual funds pool investors' money; ETFs trade like stocks and often have low expense ratios. Index funds aim to match a benchmark, while active funds try to beat it and usually charge more. A load is a sales charge; a no-load fund does not charge one. Expense ratios reduce returns every year. NAV is a fund's per-share value. Bonds are sensitive to interest rates: when rates rise, existing bond prices generally fall. Compounding grows principal plus prior earnings.
Worked example
$5,000 is invested at 6% annually for 20 years. Future value = $5,000 × (1.06)^20. Since 1.06^20 ≈ 3.207, the balance is about $16,035. The $11,035 gain is compound growth. Using the Rule of 72, 72 ÷ 6 = 12 years to double, so 20 years is less than two doublings. If the fund charges a 1% annual expense ratio instead of 0.20%, the net return is lower, and the gap compounds against the investor.
Traps
Do not assume a high past return guarantees future results. A low share price does not make a fund cheap. Loads and expense ratios are separate costs. FDIC insurance does not cover stocks, bonds, or mutual funds. Concentration in one stock is not diversification. Do not ignore inflation when evaluating real returns.