Question

Tyrone recently invested $5,000 in shares of the Vanguard 500 Index Mutual Fund. Which of the following statements is true?

a) Vanguard 500 Index Mutual Fund is a fixed-income investment.
b) Vanguard 500 Index Mutual Fund represents a diversified portfolio of 500 different individual stocks.
c) The value of Tyrone's investment will not change over time.
d) Tyrone invested in a single stock rather than a mutual fund.

Answer 1

The Vanguard 500 Index Mutual Fund represents a diversified portfolio of 500 individual stocks, aiming to track the overall market performance.

Step-by-step explanation:

The correct answer to the question is that Vanguard 500 Index Mutual Fund represents a diversified portfolio of 500 different individual stocks. This means option b) is true. Investing in a mutual fund provides diversification because mutual funds can own an array of stocks and bonds, reducing the risk compared to investing in individual stocks. Specifically, an index fund like Vanguard 500 aims to imitate the overall behavior of the stock market by holding a broad spectrum of assets, which in this case are the stocks of the 500 largest companies by market capitalization in the U.S. The value of Tyrone's investment will fluctuate over time based on the performance of these companies and the stock market as a whole.