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Investment U Pop Quiz!
By Dr. Steve Sjuggerud, President, Investment U
Thursday, January 16, 2003: Issue #205
Today it’s time to take a step back and find out how much we’re learning as investors. It’s important every now and then to measure our progress and find out what lessons we’re taking to heart. So take this quick Pop Quiz – I promise it will be painless – and find out how much you really know (The answers and explanations are at the bottom.)
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Pop Quiz Question #1: What’s Wrong With The Dow (from E-Letter #204)
The Dow Jones Industrial Average, the stock market index that everyone talks about, is actually not a very good barometer of the stock market. In IUEL #104, we identified two fundamental problems with the Dow. The first problem we identified was that the Dow only has 30 stocks. What was the second fundamental problem with the Dow?
A. The Dow is a price-weighted index.
B. The Dow is a size-weighted index.
C. The Dow is a share-based index.
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Pop Quiz Question #2: The Only Two Things That Affect the Value of Your Money (from E-Letter #201)
The only two things that affect the value of a “rich country” currency are:
A. Its current deficits and the value of its exports.
B. Its purchasing power relative to other countries and its real interest rate differentials.
C. The price of gold and the country’s current rate of exchange in relation to the U.S. dollar.
D. Its inflation-adjusted interest rates and the price of real estate within the country.
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Pop Quiz Question #3: Inflation-Protected Securities (from E-Letter #200)
True of False: There is only one type of investment that is truly guaranteed and will always absolutely keep up with inflation and pay you a positive return on your money.
A. True
B. False
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Pop Quiz Question #4: Post-Peak Performance (from E-Letter #199)
After the stock market peak of the 1960s, which investment class performed best – returning 19.4% — during the period from 1968 to 1979?
A. Stocks
B. Single-family homes
C. Farmland
D. Gold
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Pop Quiz Question #5: What Really Drives You (from E-Letter #197)
Which of the following two options – when presented to investors – was selected by an overwhelming 80% as their personal preference?
A. An 80% chance of winning $4,000 versus a 20% chance of earning nothing
B. A 100% chance of receiving $3,000.
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OK, then let’s see how you did – on to the answers!!!
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Answer #1: A – The Dow is a price-weighted index. The 30 stocks in the Dow are not treated according to size, as you might expect. The higher the price of a stock, the more weighting it gets in the index. Read IU E-Letter #204
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Answer #2: B – Although some people might argue that other factors – such as budget deficits – matter I have found that there are only two clear things that affect the value of a “rich country” currency: its “purchasing power” relative to other currencies, and its real interest rate differentials. Read IU E-Letter #201
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Answer #3: A. – True. An inflation-protected security is the only one type of investment that is truly guaranteed and will always absolutely keep up with inflation and pay you a positive return on your money. I’ve been writing about these investments for years. And they have performed phenomenally well. Read IU E-Letter #200
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Answer #4: D – Yes, that’s right gold was the top performer following the stock market peak of the 1960s. Incidentally, stocks returned just 3.1% during that period – a little less than half the rate of inflation (6.5%) during that time. Read IU E-Letter #199
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Answer #5: B – Even though the first choice is mathematically the better bet (with a mathematical “expectation” of $3,200), 80% of people choose the guaranteed money. They aren’t willing to risk a small profit for a potentially bigger one. Read IU E-Letter #197
So how did you do? I hope that today’s Pop Quiz shows you how much ground we’ve covered just in the last few E-Letters.
Good investing,
Steve
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