Practice Questions

Which of the following methods is most likely to result in the highest average long-term gains over 10 years in the stock market?

a. Buy and hold the top 5 S&P stocks this afternoon for 10 years.

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b. Hire a monkey to throw 10 darts at newspaper stock pages, hold those 10 stocks for 10 years.

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c. Pay an investment professional a 10% annual fee on an actively managed mutual fund for 10 years.

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d. Actively buy and sell stocks daily for 10 years.

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Why are the funds that beat the market different every year?

a. Changing economic factors and random fluctuations favor different funds over time.

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b. Fund managers must follow strict patterns of investment that change each year.

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c. Successful funds often intentionally lose to avoid excessive attention.

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d. Regulations require funds to rotate their investments annually.

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Many expert stock pickers underperform the market. What economic concept best explains why it’s hard for them to consistently outperform a passive index fund like the S&P 500?

a. Diminishing marginal utility

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b. The Efficient Market Hypothesis

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c. The Law of Demand

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d. Moral Hazard

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Which of the following is the best explanation for why passive funds tend to outperform active ones over the long term?

a. Passive funds use more advanced algorithms.

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b. Active managers overweight tech stocks.

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c. Passive funds avoid the drag of higher fees and inconsistent forecasting performance.

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d. Active funds tend to outperform passive funds over the long term.

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Why might financial media’s focus on “hot stocks” and “market winners” be misleading to everyday investors?

a. Because such stories ignore transaction costs

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b. Because they are influenced by lobbying

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c. Because most stocks pay very low dividends

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d. Because they highlight outcomes without showing the distribution of failed attempts

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How Do Economists Think About Stock Investing?

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