CFA Level I · CFA Level I Exam · Types of Financial Returns
An analyst observes a return of 3.0% over a 73-day period and wants the annualized return, assuming a 365-day year and compounding of the same return in each period. The annualized return is closest to:
The annualized return is about 15.9%. A 73-day period repeats five times in a 365-day year, so the annualized return is 1.03 raised to the fifth power minus one. Simply multiplying by five gives 15.0%, which ignores compounding.
- A15.0%
- B15.9%Correct
- C16.1%
Explanation
There are 365/73 = 5 periods per year. Annualized = (1.03)^5 - 1 = 1.15927 - 1 = 15.9%. Multiplying 3.0% by 5 gives 15.0%, which ignores compounding. Option C is not supported by the compounding calculation.
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