In-class Group Exercises on the Power of Compounding

[steven_huang]

The following are in-class problems that emphasize the power of compounding. These are ideal for small groups, and each problem utilizes real data. The first is a case study on one stock, Chipotle, and the second focuses on the catch-up effect.

1. Stock Market Returns over Time: The Case of Chipotle from 2009 to 2015

a) On March 18, 2009, you bought 100 shares of Chipotle stock (CMG) for $60 per share instead of a used car. On March 19, 2009, each share rose $6 to $66. What was the total value of your 100 shares on March 18 and on March 19? What was the one-day percentage gain?

b) One year later, in March 2010, Chipotle stock was worth $110 per share. What was the total value of your 100 shares? What was the one-year percentage gain?

c) In March 2015, each share of Chipotle stock was worth $630. What is the total value of your 100 shares? About how many times is your investment worth today compared to 6 years ago? Using the Rule of 70, what was the approximate average annual return on investment?

d) On July 21, 2015, Chipotle Stock rose from $673 per share to $725 in one day. What was the one-day percentage increase? Based on the original $60 price in 2009, what percentage increase does this $52 rise represent?

2. Economic Growth: The Catch-Up Date for China and India’s GDP

a) In 2015, U.S. GDP is approximately $18 trillion, and the economy is growing at a rate of about 3% per year. In what year will the U.S. economy double to $36 trillion?

b) In 2015, China’s GDP is approximately $9 trillion, and their economy is growing at a rate of about 7% per year. In what year will China’s economy double to $18 trillion? In what year will it double again to $36 trillion?

c) In 2015, India’s GDP is approximately $4.5 trillion, and their economy is growing at a rate of about 5% per year. In what year will India’s economy double to $9 trillion? In what year will it double again to $18 trillion? In what year will it double again to $36 trillion?

d) In what year will each country’s GDP reach $72 trillion?

[steven_huang]

1. Stock Market Returns over Time: The Case of Chipotle from 2009 to 2015

a) On March 18, 2009, you bought 100 shares of Chipotle stock (CMG) for $60 per share instead of a used car. On March 19, 2009, each share rose $6 to $66. What was the total value of your 100 shares on March 18 and on March 19? What was the one-day percentage gain?

b) One year later, in March 2010, Chipotle stock was worth $110 per share. What was the total value of your 100 shares? What was the one-year percentage gain?

c) In March 2015, each share of Chipotle stock was worth $630. What is the total value of your 100 shares? About how many times is your investment worth today compared to 6 years ago? Using the Rule of 70, what was the approximate average annual return on investment?

d) On July 21, 2015, Chipotle Stock rose from $673 per share to $725 in one day. What was the one-day percentage increase? Based on the original $60 price in 2009, what percentage increase does this $52 rise represent?

2. Economic Growth: The Catch-Up Date for China and India’s GDP

a) In 2015, U.S. GDP is approximately $18 trillion, and the economy is growing at a rate of about 3% per year. In what year will the U.S. economy double to $36 trillion?

b) In 2015, China’s GDP is approximately $9 trillion, and their economy is growing at a rate of about 7% per year. In what year will China’s economy double to $18 trillion? In what year will it double again to $36 trillion?

c) In 2015, India’s GDP is approximately $4.5 trillion, and their economy is growing at a rate of about 5% per year. In what year will India’s economy double to $9 trillion? In what year will it double again to $18 trillion? In what year will it double again to $36 trillion?

d) In what year will each country’s GDP reach $72 trillion?