Try this financial literacy test, designed by economists Annamaria Lusardi of Dartmouth and Olivia Mitchell of Wharton, to measure competency with more sophisticated financial concepts that are the basis for financial planning and decision-making.
1. Which of the following statements describes the main function of the stock market? (a) The stock market helps to predict stock earnings; (b) The stock market results in an increase in the price of stocks; (c) The stock market brings people who want to buy stocks together with those who want to sell stocks
2. Which of the following statements is correct? (a) Once one invests in a mutual fund, one cannot withdraw the money in the first year; (b) Mutual funds can invest in several assets, for example invest in both stocks and bonds; (c) Mutual funds pay a guaranteed rate of return which depends on their past performance
3. If the interest rate falls, what should happen to bond prices? (a) Rise; (b) Fall; (c) Stay the same
4. True or false? Buying a company stock usually provides a safer return than a stock mutual fund. (a) True; (b) False
5. True or false? Stocks are normally riskier than bonds. (a) True; (b) False
6. Considering a long time period (for example 10 or 20 years), which asset normally gives the highest return? (a) Savings accounts; (b) Bonds; or (c) Stocks
7. Normally, which asset displays the highest fluctuations over time? (a) Savings accounts, (b) Bonds, (c) Stocks
8. When an investor spreads his money among different assets, does the risk of losing money: (a) Increase, (b) Decrease (c) Stay the same The answers are: 1) c; 2) b; 3) a; 4) b; 5) a; 6) c; 7) c; 8 ) b
Here’s how many respondents in a national survey chose the correct answer:
1. Main function of the stock market: 76%
2. Knowledge of mutual funds. 72%
3. Relation between interest rate and bond prices: 37%
4. What is safer: company stock vs. stock mutual fund: 80%
5. Which is riskier, stocks vs bonds: 82%
6. Highest return over long period: 70%
7. Highest fluctuations: 89%
8. Risk diversification 81%
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