Ready for a Challenge?

Last month I wrote about a recent article, Why We’re Not Wired for Successful Retirements by Philip Moeller, that was based on a financial literacy test given to consumers in Chile. I noted how many of those surveyed misunderstood the power of compound interest. Since then, blog readers have asked about the other questions. So, here they are, reprinted directly from the article. Only 68 out of nearly 14,250 tested answered all six correctly. See how you do. (The correct answers follow, but no peeking!)

  1. Chance of Disease: If the chance of catching an illness is 10 percent, how many people out of 1,000 would get the illness?
  2. Lottery Division: If five people share winning lottery tickets and the total prize is two million Chilean pesos, how much would each receive?
  3. Numeracy in Investment Context: Assume that you have $100 in a savings account and the interest rate you earn on this money is 2 percent a year. If you keep this money in the account for five years, how much would you have after five years? Choose one: more than $102, exactly $102 or less than $102.
  4. Compound Interest: Assume that you have $200 in a savings account, and the interest rate that you earn on these savings is 10 percent a year. How much would you have in the account after two years?
  5. Inflation: Assume that you have $100 in a savings account and the interest rate that you earn on these savings is 1 percent a year. Inflation is 2 percent a year. After one year, if you withdraw the money from the savings account, you could buy more/less/the same?
  6. Risk Diversification: Buying shares in one company is less risky than buying shares from many different companies with the same money. True/False

Answers:

  1.  100
  2. 400,000 pesos
  3. More than $102
  4. $242
  5. Less
  6. False

How did you do?

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