CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
A fund earns a cumulative return of 21% over two years. The annualized return is closest to:
The annualized return is 10.0%. Taking the square root of 1.21 gives 1.10, so the geometric annual return is 10%. Dividing 21% by two gives 10.5%, which ignores compounding and overstates the annual figure.
- A9.5%
- B10.0%Correct
- C10.5%
Explanation
Annualized return = (1.21)^(1/2) − 1 = 1.10 − 1 = 10.0%. Dividing 21% by 2 gives 10.5%, which ignores compounding and overstates the return.
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