1) The Florida lottery offers a "cash-three" game, which offers a top prize of $500. Lotto, on the other hand, usually has a $7,000,000 first prize. Since both games cost $1, you should only play Lotto since it has a better payout.
2) You are deciding between two mutual funds to place in your IRA (Individual Retirement Account). You find that ING Russia A (LETRX) has earned 55.5% over the past three years while the Perritt Micro Cap (PRCGX) returned only 24.4% over the same period. The Russia fund is obviously better since it returned more money over the same time frame.
3) You have several mutual funds that have collectively earned 12% per year over the past couple of years. An acquaintance tells you he manages money and you should let him handle your account because he made 30% last year and 25% the year before. He claims you're foolish to leave your money in such low-performing assets. You should:
4) You are with a friend at a casino and decide to bet $20 on red at a roulette wheel while your friend decides to play $20 worth of quarters on a slot machine. He tells you that roulette is a bad pick because, if you win, you'll only make $20. But the slot machine he's playing has a $5,000,000 prize! He says it is common sense that it's better to bet 25 cents for the chance to win $5,000,000 rather than to bet $20 for the chance to make $20. You should:
5) After the September 11 attacks, the Dow Jones Industrial Average plunged nearly 7% once it reopened for trading on September 17. As for the 30 companies representing that index, nothing changed on their part from September 10 to September 17 yet their prices fell. Why do you suppose that happened?
6) Why do you suppose that a used car sold through a dealership is more expensive than an identical one sold through a private seller?
7) You work for a bank's loan department and find they have loaned money to a dentist at 5% and at 8% to a car salesman for the same loan. Both the dentist and car salesman earned the same amount of money last year and have excellent credit. Why did the bank give a higher rate to the salesman?
8) You wish to buy a bond and find that General Motors has issued a one-year bond that pays 2% while the Fly-by-night company has issued a bond that pays 10%. What can you determine by these numbers?
9) You find a watch on eBay for $1,000. It is brand new but the seller says that all sales are final. The same watch sells for $1,200 in your local mall that does accept returns. Which is a reason it is cheaper on eBay?
10) For each dollar bet at roulette, a casino offers a $1 payout for betting on red, an $8 payout for a four-number bet, and a $35 payout for a single number. Which bet is riskiest?
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