Question

What should an investor consider when making an investment? Check all that apply.

the rate of inflation, which could affect the value of the return
the history of the investment, which will indicate the level of risk
any taxes that will need to be paid at the state and federal levels
the nominal interest rate, which will show the real profit to be made
the length of the investment, because long term always means high risk
the level of risk, because the higher it is, the higher the potential loss is

Answer 1

Check the ones that apply: 1, 2, 3, and 6.

Brief notes:
- the rate of inflation, which could affect the value of the return — Yes. Inflation reduces real (purchasing-power) returns.
- the history of the investment, which will indicate the level of risk — Yes (with a caveat). Past performance and volatility help assess historical risk, but they don’t guarantee future results.
- any taxes that will need to be paid at the state and federal levels — Yes. Taxes affect net returns and should be considered.
- the nominal interest rate, which will show the real profit to be made — No. The nominal rate does not equal real profit; you must adjust for inflation (and taxes) to find real return.
- the length of the investment, because long term always means high risk — No. Time horizon matters, but long term does not always mean higher risk (it can reduce short-term volatility risk for some assets).
- the level of risk, because the higher it is, the higher the potential loss is — Yes. Higher risk generally implies greater potential loss (and often greater potential gain).