FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation
A stock rises from 80 to 88 over one month, with no dividends. What is the continuously compounded (log) return for the month?
The log return is 9.53%. It equals the natural log of the price ratio, ln(88/80) = ln(1.10) = 0.0953. This is lower than the 10% simple return, because log returns compress positive gains.
- A9.09%
- B9.53%Correct
- C10.00%
- D10.53%
Explanation
Log return = ln(88/80) = ln(1.10) = 0.0953, or 9.53%. The simple return is 10%, and the log return is always smaller for a positive gain. 9.09% is the figure from 1 − 1/1.10, which is the wrong base.
Did you get it right without looking?
One question tells you little. A timed set on Measuring Return, Volatility, and Correlation shows your real accuracy, how long you take and where you lose marks.
More Measuring Return, Volatility, and Correlation questions
- A sample of 5 returns is: -4%, -2%, 0%, 2%, 4%. Using the population-style moment formulas (dividing by n), what are the sample skewness and…
- A stock has a return standard deviation of 30% and the market has a return standard deviation of 20%. The correlation between the stock and …
- An analyst estimates correlation between two assets using 250 daily returns in a calm period, getting 0.30. In a later crisis, the assets fr…
- An analyst computes the Pearson correlation between daily returns of two equity indices and obtains 0.05. She concludes the two indices are …
- A stock is bought at 40 and, one year later, trades at 42 after paying a dividend of 1 during the year. Ignoring reinvestment of the dividen…
- The sample covariance between the monthly returns of Stock A and the market index is 0.00360, and the variance of the market index's monthly…