CFA Level I · CFA Level I Exam · Types of Financial Returns
A fund earned a cumulative holding period return of 46.41% over four years. Assuming annual compounding, the annualized return is closest to:
The annualized return is 10.0%. Taking the fourth root of 1.4641 gives 1.10, because 1.10 raised to the fourth power equals 1.4641. Dividing the cumulative return by four gives 11.6%, which wrongly ignores compounding.
- A10.0%Correct
- B11.6%
- C12.5%
Explanation
Annualized return = (1.4641)^(1/4) - 1. Since 1.1^4 = 1.4641, the result is 10.0%. Dividing 46.41% by 4 gives 11.6%, which ignores compounding.
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