Money maths - how good are you? Poll discussion

Former_MSE_Lawrence

Money maths - how good are you? This is a repeat of a poll I did back in 2005, to see how good you are at figuring out a basic, but not straightforward money sum. Which of the following gives the best return? (correct answer in next week's e-mail) The stockmarket....

A. rises 5% a year for 4 years then drops 5% a year for 4 years
B. drops 5% a year for 4 years then rises 5% a year for 4 years
C. stays the same
D. all are equal

Did you get it?

FOR THE RESULT AND ANSWER: CLICK HERE

mathynut

According to my sums both A and B result in converting £100 into £99. So C must be the best bet - £100 stays at £100. That is, ignoring commission charges!

reehsetin

i think its a,

katecheshire

with A, if you were canny and worked on the principle that what goes up must come down, you would take your profits at the top of the market. So A offers the best potential but C is no profit, no loss, no fun!!

trf197

Definitely "stays the same is the best":

(A and B are the same sum in a different order - it doesn't matter what order you multiply)

Case A - rises first then falls:

original x 1.05 x 1.05 x 1.05 x 1.05 x 0.95 x 0.95 x 0.95 x 0.95 = original x 0.9975 (1/4 percent fall from original)

Case B - falls first then rises:

original x 0.95 x 0.95 x 0.95 x 0.95 x 1.05 x 1.05 x 1.05 x 1.05 = original x 0.9975 (1/4 percent fall from original)

trf197 (Maths Teacher)

denny250

trf197 yep thats the way i did it

halia

stays the same is the best bet if you have to leave your cash in for the whole 8 years.
If you can take it out at any point then obviuosly you go for A

what about inflation? real return on money if you invest £100, 8 years later it is still £100 but its buying power has decreased

CCCele

I'd go for e) put the money in the top savings account at 6.05%.

Babbler

Yup - C is the answer IMHO

ErictheHalfaBee

Yep - C.

The trick being that you're not gaining and losing 5% of the same thing:

If you gain 5% and then lose 5%, you're losing 5% of a bigger amount than your original stake, so you lose more than you gained.

On the other hand:

If you lose 5% and then gain 5%, you're gaining 5% of a smaller amount than your original stake, so you gain less than you lost.

Either way, you end up worse off than just keeping your original stake

Biggles

But it's loss of 1% over the eight years, surely?

£100
1yr 105
2yr 110.25
3yr 115.76
4yr 121.55
5yr 115.47
6yr 109.70
7yr 104.21
8yr 99.00

And similar for option B

Whichever, am I alone in finding it worrying that less than 1/3rd of people got the right choice (at the time I voted)?