CFA Level I · CFA Level I Exam · The Return and Risk of a Financial Portfolio
An analyst has three quarterly returns of 2.0%, 3.0% and 1.0%, and a fourth quarter return of 4.0%. The annualized return from compounding these four quarterly returns is closest to:
The compounded annual return is about 10.4%. Multiplying the four growth factors 1.02, 1.03, 1.01 and 1.04 gives roughly 1.1036. Simply adding the quarterly returns to get 10.0% ignores the compounding of returns across quarters.
- A10.0%
- B10.4%Correct
- C11.2%
Explanation
Growth = 1.02 × 1.03 × 1.01 × 1.04. 1.02×1.03 = 1.0506; ×1.01 = 1.061106; ×1.04 = 1.103550. Return ≈ 10.4%. Summing the returns gives 10.0%, which ignores compounding.
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