How strong is your investing knowledge?

Take our 10-question quiz below to test your investing knowledge. If you’ve got any of the questions incorrect, we’ve put together some resources that can help you bolster your knowledge on the topic.

Investments

1. An investor is considering two dividend-paying stocks for their portfolio: Stock A has a current dividend yield of 4% with a projected annual dividend growth rate of 5%, while Stock B has a current dividend yield of 3% with a projected annual dividend growth rate of 7%. Assuming both stocks are held for 10 years, trade at a constant dividend yield and dividends are reinvested, which stock will generate more higher income at the end of the 10 year period?

A. Stock A, because its higher current dividend yield will result in more immediate income, despite its lower growth rate.
B. Stock B, because the higher dividend growth rate will significantly increase its dividends over time, compensating for the lower initial yield.
C. Both stocks will generate the same total return because the dividend yield and growth rate are inversely related.
D. Stock A, because a higher starting yield is always more beneficial for long-term income, regardless of growth rate.

2. An investor is considering two ETFs for their portfolio: ETF A, which is a passively managed ETF tracking the S&P 500 with a low expense ratio of 0.05%, and ETF B, which is an actively managed ETF targeting a sector rotation strategy with an expense ratio of 0.50% and an additional performance fee of 1.25%. Given that ETF B has historically outperformed the S&P 500 index by 2% annually over the past 5 years, what are the key risks that the investor should assess when comparing the two ETFs, particularly in terms of long-term returns and volatility?

A. The investor should assess the historical outperformance of ETF B, but must also consider the significantly higher fees, which could erode the additional returns over the long term, and the risk that the sector rotation strategy may not continue to outperform in the future.
B. The investor should prioritize ETF B because its active management and higher fees guarantee continued outperformance of the S&P 500, assuming that sector rotation is always an effective strategy.
C. The investor should choose ETF A because its lower fees guarantee higher long-term returns, regardless of ETF B’s historical performance, and volatility is irrelevant.
D. The investor should focus on ETF B’s sector rotation strategy and ignore the higher fees, as the strategy's historical success will offset any additional costs and reduce overall risk.

3. On average, franking credits have contributed approximately what percentage to the total return of Australian shares over the past several decades?
A. 1-2%
B. 3-4%
C. 5-6%
D. 7-8%

4. When investing in an Exchange-Traded Fund (ETF) listed overseas, which of the following is a key risk that investors need to consider?

A. The ETF will always be subject to higher management fees than domestic ETFs.
B. Currency risk arises due to fluctuations in the exchange rate between the Australian dollar and the currency of the ETF’s domicile.
C. ETFs listed overseas are not subject to any tax implications for Australian investors.
D. Liquidity risk because global ETFs have higher trading volumes than Australian ETFs.

5. What is one key feature that distinguishes a Listed Investment Company (LIC) from an Exchange-Traded Fund (ETF)?

A. LICs are actively managed with a professional manager, while ETFs are always passively managed.
B. LICs trade at a price determined by the market, which can be above or below their net asset value (NAV), while ETFs typically trade close to their NAV.
C. LICs distribute income half-yearly, while ETFs distribute income annually.
D. LICs can only invest in Australian equities, while ETFs can invest across asset classes.

6. A CEO is responsible for making capital allocation decisions to maximize shareholder value. Which of the following is NOT a typical capital allocation decision?

A. Reinvesting profits into the business to drive growth.
B. Returning cash to shareholders through dividends or share buybacks.
C. Diversifying personal investments outside of the company.
D. Pursuing acquisitions or mergers to expand the company.
E. Reducing debt by allocating capital to pay down liabilities.

Superannuation

7. Which of the following best describes the role of an SMSF trustee in managing investments and ensuring compliance?

A. The SMSF trustee is responsible for ensuring the fund's investments align with the retirement goals and risk profile, but they do not need to comply with specific legal obligations unless audited.
B. The SMSF trustee must develop a comprehensive investment strategy, ensure all investments comply with superannuation laws, and keep records for auditing purposes.
C. An SMSF trustee only needs to make investment decisions in line with the fund’s risk profile and ensure the fund complies with tax laws but is not responsible for day-to-day management.
D. The SMSF trustee’s responsibility is limited to choosing stocks and managing fund assets based on a general market trend, without specific adherence to legal or regulatory requirements.

8. Many investors in superannuation are in their default superannuation option and encouraged to focus on risk tolerance instead of risk capacity. What is the key difference between risk tolerance and risk capacity in investment decision-making?

A. Risk tolerance refers to how much risk an investor is willing to take, while risk capacity refers to how much risk an investor can afford to take financially.
B. Risk tolerance is a measure of the potential returns an investor expects, while risk capacity measures the amount of money an investor needs to save.
C. Risk tolerance and risk capacity are the same, both reflecting an investor’s emotional comfort with market volatility.
D. Risk tolerance is the amount of risk an investor is legally allowed to take, while risk capacity is their financial ability to handle risk.

9. Which of the following best describes the "safe withdrawal rate" in retirement, and how does the 4% rule relate to this concept?

A. The safe withdrawal rate is the percentage of a retirement portfolio that can be withdrawn safely annually given historic returns and volatility; the 4% rule suggests withdrawing 4% of the initial portfolio value in the first year of retirement and annually adjusting the dollar amount for inflation.
B. The safe withdrawal rate is the amount of income that can be taken from a retirement account, without regard to the portfolio's performance or inflation, and the 4% rule suggests withdrawing 4% of the final portfolio value each year.
C. The safe withdrawal rate refers to withdrawing a fixed amount of income regardless of market conditions, and the 4% rule suggests withdrawing 4% of the portfolio’s total value in the first year, increasing with inflation thereafter.
D. The safe withdrawal rate is based on a dynamic strategy that adjusts withdrawals according to market performance, and the 4% rule assumes no adjustments are made to withdrawals during retirement.

10. In the bucket portfolio strategy, how might a retiree adjust their asset allocation within each bucket during periods of significant market volatility, such as a market crash, to maintain the strategy's effectiveness?

A. The retiree should sell off assets from Bucket 1 to rebalance the portfolio, ensuring that risk is reduced across all buckets.
B. The retiree should increase their allocation to high-risk assets in Bucket 3, allowing for maximum growth potential, and reduce allocations in Buckets 1 and 2 to preserve capital.
C. The retiree should take withdrawals from Bucket 3 and leave Buckets 1 and 2 to ensure that short-term and medium-term expenses are covered without having to sell assets at a loss.
D. The retiree should reallocate funds equally across all three buckets to maintain a balanced portfolio, regardless of market conditions.

ANSWERS

1. B. Stock B, because the higher dividend growth rate will significantly increase its dividends over time, compensating for the lower initial yield.