Multiple Choice
Which of the following is a possible penalty for committing financial statement fraud?
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6. Internal Controls and Reporting Cash
Fraud and the Fraud Triangle
Multiple Choice
Why is it risky to base your investment strategy solely on picking individual stocks?
A
It eliminates the need for ongoing research and monitoring of investments.
B
It increases exposure to unsystematic risk, which cannot be diversified away by holding only a few stocks.
C
It guarantees higher returns compared to investing in index funds.
D
It ensures that all investments will outperform the overall market.
Verified step by step guidance1
Understand the concept of unsystematic risk: Unsystematic risk refers to the risk associated with a specific company or industry. It is unique to individual stocks and can be mitigated through diversification.
Recognize the importance of diversification: Diversification involves spreading investments across various assets or industries to reduce exposure to unsystematic risk. By holding only a few stocks, an investor is more vulnerable to the performance of those specific stocks.
Compare individual stock investing to index funds: Index funds are diversified portfolios that track the performance of a market index, reducing unsystematic risk and providing more stable returns over time.
Evaluate the need for ongoing research: Investing in individual stocks requires continuous monitoring and research to stay informed about company performance, industry trends, and market conditions. This can be time-consuming and challenging for many investors.
Understand the misconception of guaranteed returns: No investment strategy guarantees higher returns or outperformance of the market. Individual stock investing carries higher risk and does not ensure better results compared to diversified strategies like index funds.
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