Unit quiz: Compounding, Purchasing Power, and the Price of Risk

Check understanding, separately from reading

5 questions · 80% to pass · no timer. This quiz checks the lessons in this unit. These authored questions assess recognition and application of the taught distinctions, not professional qualification. You may review the lessons and retry. Repeat attempts reuse the question bank; a remembered answer is not proof of transfer to a new situation.

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Question 1

One provider advertises a '6% annual rate compounded monthly' and another advertises '6.17% compounded annually'. A saver asks which is larger. What is the defensible answer?They describe almost the same effective annual growthThe monthly offer is 0.17 points better, and frequency compounds that advantage again

Question 2

A brochure reports an '80% total return over ten years' and summarizes it as '8% a year'. A reviewer checks the arithmetic. What does the check show?Total returns cannot be converted into an annual rate at allCompounding a true 8% would produce $21,589.25 per $10,000, above the $18,000 actually reached

Question 3

A saver notes that her account's nominal balance has risen every year for two decades but says she feels poorer. What single piece of evidence would test that claim?Restate the balance in the purchasing power of a stated base yearCompare the balance with last month's balance to confirm the direction

Question 4

A fund advertises a '10% average annual return'. The two years shown gained 40% and then lost 20%. What does the path arithmetic show?A 10% annual gain, because the arithmetic average is 10%A 12% cumulative gain, which compounds at about 5.8301% a year

Question 5

A portfolio holds two funds with different strategies, but seven of the ten largest companies in each are the same. Both fall sharply when that industry falls. Was the portfolio diversified in the relevant sense?No; a single economic exposure was held under two product namesYes; two separate funds cannot move in the same direction

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