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FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation

A stock is priced at USD 80.00 at the start of the month and USD 88.00 at the end of the month, with no dividends paid. What is the continuously compounded (log) return for the month, rounded to four decimal places?

The log return is ln(88/80) = ln(1.10), which equals about 0.0953 or 9.53%. The simple return of 10% is larger because log returns are always below simple returns when the return is positive.

  1. A0.0953Correct
  2. B0.1000
  3. C0.0910
  4. D0.1100

Explanation

Log return = ln(88/80) = ln(1.1) = 0.09531. The simple return is 10.00%, so 0.1000 is the simple return, not the log return. 0.0910 is a sign error that treats the base as the ending price: ln(80/88) is -0.0953, and 1 - 88/80... is not valid either. 0.1100 is unsupported.

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