What is dollar-cost averaging?

Question

BlackTom AI · Accepted Answer

Question restatement: What is dollar-cost averaging?
Answer options provided: The investor invests a set dollar amount into some type of investment on a set schedule.
Additional note: No other answer options are supplied to evaluate or compare.

Explanation of the provided option:
- The statement describes dollar-cost averaging as investing a fixed dollar amount at regular intervals, regardless of the investment’s price at those times. This is the core idea behind dollar-cost averaging: commit to a consistent amount (not a constant number of shares) so that you buy more shares when prices are low and fewer shares when prices are high, which can reduce the average cost per share over time.

Why this is conceptually correct:
- It emphasizes a systematic, time-based investment approach rather than trying to time the market.
- It allocates a constant monetary amount, which leads to buying varying quantities of shares based on price fluctuations.
- It is often used as a risk management strategy for long-term investing and for individuals who want to automate purchases.

Notes on the absence of other options:
- Without alternative statements, we cannot analyze incorrect choices or common misconceptions (e.g., investing a fixed number of shares each period, or attempting to time market highs and lows).
- In typical multiple-choice questions, distractors might mischaracterize dollar-cost averaging as market-timing, or as investing a fixed total amount once, or as varying investment amounts. Since those options are not present here, there is no opportunity to critique those specific incorrect ideas in this response.

Summary for understanding (without stating the correct option explicitly):
- Dollar-cost averaging is about investing a fixed dollar amount at regular intervals to build an investment position over time, leveraging price fluctuations to potentially reduce the average cost per share.

MSB-250-300-002 Topic 15 Quiz

What is dollar-cost averaging?

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