In-class Group Exercises on the Power of Compounding

[#1]

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?

[vickyci]

One of the challenges of using real examples is finding companies that exist in all parts of the country. In Hawaii, many of the popular chains, including Chipotle, aren't available. However, most students in Hawaii are aware of the major chains from visits to the mainland.

[chiang]

Yes, that's very true. Students need to be able to relate to the examples used. That's why I tend to avoid using old television and movie clips (despite their popularity among some instructors), because students don't tend to watch these shows anymore.

[vickyci]

That's true. It's hard to understand the context of a story without having a broader knowledge of the characters and the situation.