CFA Level I · CFA Level I Exam · Types of Financial Returns
A stock has continuously compounded returns of 4.0%, -2.0%, and 6.0% over three consecutive months. The stock's holding period return over the three months is closest to:
Continuously compounded returns are additive, so the three-month log return is 8.0%. Converting to a holding period return gives e^0.08 - 1, which is about 8.3%. The 8.0% option wrongly treats the log return as a simple return.
- A7.5%
- B8.0%
- C8.3%Correct
Explanation
Log returns add: 4 - 2 + 6 = 8.0% over three months. The holding period return is e^0.08 - 1 = 0.08329, or 8.3%. Choosing 8.0% mistakenly treats the log return as the simple return.
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