CFA Level I · CFA Level I Exam · Statistical Distributions for Financial Asset Prices and Returns
A stock rises from 80 to 100 over one year. The continuously compounded return for the year is closest to:
The continuously compounded return is the natural log of the price relative: ln(100/80) = ln(1.25), which is about 22.3%. The 25% figure is the simple holding period return, and 20% incorrectly uses the ending price as the base.
- A20.0%
- B22.3%Correct
- C25.0%
Explanation
Continuously compounded return = ln(100/80) = ln(1.25) = 0.2231, or 22.3%. The 25.0% figure is the holding period return, and 20.0% wrongly divides the gain by the ending price.
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