Stage 0
72 questions
What three functions does money serve?
Medium of exchange, unit of account, and store of value. It performs the last one worst.
Where is most money actually created?
At commercial banks, through lending, not at the central bank.
Does a larger money supply necessarily lead to inflation?
No. Velocity of circulation and real output also change. The relationship is real, but not mechanical.
At 3.5 percent inflation, how long until purchasing power halves?
About twenty years, since 70 divided by 3.5 is 20.
What's the real return at 2 percent interest and 3 percent inflation?
Roughly minus one percent. Despite the interest credit, you're losing purchasing power.
Why does your personal inflation rate often differ from the official one?
Because the official rate measures an average basket of goods, and your own spending pattern differs from it.
Down 50 percent, then up 50 percent. Where do you stand?
At 75 percent of the starting value. The simple average of zero doesn't hold.
Which average describes your actual result over several years?
The geometric mean, meaning the annualized return.
Why is volatility mathematically expensive?
Because the geometric return falls below the expected return as volatility rises, by roughly σ²/2.
How long does it take to double your money at 8 percent?
About nine years, since 72 divided by 8 is 9.
Why is the gain in the final years the largest?
Because the annual gain is calculated on capital that's already grown, and so it grows exponentially in its own right.
Why do fees have such a strong effect over long periods?
Because they use the same exponential mechanism, just against you.
Why isn't individual-stock risk compensated?
Because it can be avoided through diversification. The market pays no premium for avoidable risk.
Does higher risk automatically mean more return?
No. It means a higher expectation with a wider spread of possible outcomes, including very bad ones.
What follows for offers of high, safe returns?
That something is wrong. Such combinations don't survive competition for long.
Does a company get money when you buy its stock?
Only at the IPO or a capital increase. In normal trading, your money goes to the previous owner.
What exactly does the displayed price tell you?
The price at which the most recent trade happened. It doesn't mean any quantity could be traded at that price.
Why isn't comparing order fees enough?
Because the spread and execution quality create additional costs that aren't itemized.
What do you actually own with a stock?
A share of the company, with voting rights, a claim on dividends, and a subordinate claim on any remaining assets.
Where do you stand as a shareholder in a bankruptcy?
Dead last. Every creditor gets paid first, then shareholders.
What drives stock returns over ten years and more?
Essentially dividend yield and earnings growth. Valuation swings matter less and less over time.
Why does a bond's price fall when interest rates rise?
Because new bonds offer more. The present value of the old, lower-paying cash flows drops accordingly.
What does modified duration measure?
Roughly, the percentage price change per percentage-point change in yield.
Which risk disappears if you hold to maturity, and which doesn't?
Interest-rate risk disappears; credit risk remains.
Which risk does a broad ETF remove, and which doesn't it?
It removes the risk of individual companies; it doesn't remove the risk of the overall market.
What happens to your ETF if the provider goes bankrupt?
Nothing. An ETF is a segregated asset pool and doesn't fall into the bankruptcy estate.
Why is tracking difference more informative than the cost ratio?
Because it measures the actual deviation from the index, capturing securities-lending income and tax effects too.
Why is the case against active funds arithmetic rather than empirical?
Because all active portfolios together make up the market. After costs, they must on average fall behind.
What is survivorship bias in this statistic?
Closed or merged funds vanish from the data, making the active side look better than it actually was.
Does the past help pick a good fund?
Barely. The persistence of past outperformance is empirically weak.
What problem does the technology behind cryptocurrencies solve?
Double-spending the same balance, without needing a trusted central authority.
Why is a coin harder to value than a stock?
Because there's no cash-flow stream from which a present value could be derived.
What risk do you mainly carry with a stablecoin?
A credit risk: it depends on whether the backing reserves actually exist and are verifiable.
Why can't an old entry be changed unnoticed?
Because every block contains the hash of the one before it. A change would invalidate the entire chain that follows.
What's the difference between proof of work and proof of stake?
One creates economic weight through computing effort, the other through posted capital that's forfeited on misbehavior.
What is the oracle problem?
A blockchain can secure the consistency of its entries, but can't verify whether they match reality.
Where does a long-term investor's return come from?
From the risk premium and the actual value companies create. All long-term investors can win at the same time.
Why is short-term trading a negative-sum game after costs?
Because every gain is matched by a loss, plus spread, fees, and taxes on top.
What question should you ask yourself before every trade?
What exactly is my edge over the person on the other side of this trade.
What did Barber and Odean find in their analysis?
Investors with the highest trading turnover performed worst, and the most passive ones performed best.
What's the return gap between funds and fund investors?
Investors earn less than their own fund does, because they buy after gains and sell after declines.
Why is exiting during a decline so costly?
Because the strongest recovery days fall disproportionately during periods of high uncertainty, when you're then not invested.
Why can a price fall on good news?
Because the market had expected even better news. The expectation was already priced in.
What does the semi-strong form of market efficiency claim?
That all publicly available information is already reflected in prices.
What does that mean for you in practice?
That trading on publicly known news gives you no edge.
What do market makers earn from?
The spread and fees from trading venues, not from betting on direction.
What does adverse selection mean in trading?
That the other side tends to trade precisely when it's advantageous for them, meaning generally to your disadvantage.
Why doesn't the other side matter for long-term investing?
Because the return comes from the risk premium and the value companies create, not from outsmarting anyone.
At what decline is a bear market usually said to begin?
Roughly twenty percent from the last high. That's a convention, not a signal.
What mechanism causes bubbles to burst?
Leveraged positions force sales as prices fall, which triggers further declines.
How is a bubble best identified in real time?
Less by high valuations than by the extent of debt financing in the market.
What is the disposition effect?
The tendency to hold losing positions and sell winning ones too early.
Why does raising your stake after a loss lead to ruin?
Because expected value stays negative and capital is finite. Repeated application ends in total loss with certainty.
What's the value of a rule written down in advance?
That it doesn't get renegotiated in the moment of emotional pressure.
What suits a fixed-term deposit, and what doesn't?
Money with a known date. Not the emergency fund, since you can't access it.
What should you watch for with deposit insurance?
That several brands can belong to the same institution, so protection doesn't multiply as a result.
What typically remains, in real terms, after tax?
Often around or below zero. Interest accounts usually don't preserve purchasing power.
Why can't gold be valued like a stock?
Because there's no cash-flow stream from which a present value could be calculated.
How do rising real interest rates affect the gold price?
They raise the opportunity cost of holding it and tend to weigh on the price.
Where does gold's portfolio benefit come from?
From its low, sometimes negative correlation to stocks, not from an expected return.
What does contango mean?
Later futures contracts trade more expensively than earlier ones. Every renewal of the position then costs money.
Can a commodity fund lose money even as the commodity gets more expensive?
Yes. Negative roll yield can eat up the spot-price gain.
Are commodities a reliable inflation hedge?
The evidence is mixed and depends heavily on the time period and the index's composition.
Why is gross rental yield misleading?
Because it excludes transaction costs, upkeep, management, and vacancy. Only net rental yield is informative.
When does debt financing work against the owner?
When the loan rate exceeds the property's yield, for instance on a more expensive refinancing.
Why do direct properties appear more stable than REITs?
Because they're valued only rarely. The smoothing is a measurement effect, not lower actual volatility.
Why are return indices for collectibles distorted?
Because they're based on repeat sales. Items with no demand never show up in them.
How high are typical auction trading costs?
Buyer's premium and seller's commission combined often run twenty to thirty percent.
What's the information-asymmetry problem here?
Authenticity and quality are hard to verify. The uninformed buyer bears that uncertainty.
What's the most important dividing line between asset classes?
Whether the asset generates a cash flow, or depends purely on price.
Why is illiquidity doubly dangerous?
Because your own need for liquidity and the deterioration in tradability typically hit at the same time.
Where does the benefit of a portfolio addition come from?
From its contribution to overall volatility, meaning its correlation, not its standalone return.