In my opinion, all of the questions that the majority answered incorrectly are poorly worded.
I’d quibble with the wording of the bond question, as the relation depends on several other factors that are not mentioned, such as market expectations. For example, if the question was slightly modified as follows, it would have the opposite answer. I do not think this question belongs on the test, as it’s not what I’d consider a basic financially literacy question.
“If fed rate increase is less than market expectations, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?”
I also don’t like the wording in the how long it takes 20% interest to double question. It has choices as follows. Between 4 and 5 years seems like a reasonable answer for a financially literate person (who is doing math in head instead of using calc). However, 4 to 5 is not an option. Perhaps the person designing the test is assuming the financially literate person will think 5+ is eliminated, so it must be 2-4. However, they also might think 4.x rounds up to 5, rather than taking the wording literally. It would be more clear to have intervals without gaps.
- Less than 2 years
- 2 to 4 years
- 5 to 9 years
- 10 or more years
- Don’t know
The final question that the majority answered incorrectly was Buying a single company’s stock usually provides a safer return than a stock mutual fund. I suspect that if you asked the people why they got the question wrong, most would indicate that they didn’t have a good understanding about what a mutual fund is and were not picturing a broad market index fund composed of many individual stocks . For example, if the wording replaced “stock mutual fund” with “S&P 500 index fund”, I suspect a much larger portion would get the question correct.
While not having a good understanding of mutual funds is a form of financially illiteracy, it’s important to distinguish between not having a good understanding of mutual funds vs not knowing that diversity reduces risk. If the author of the test was trying to evaluate the latter, this question does not do so.