CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
An analyst observes a weekly return of 0.25% that is expected to repeat every week, with returns compounded over 52 weeks in the year. The annualized effective return is closest to:
The annualized effective return is about 13.87%. Raise 1.0025 to the 52nd power and subtract one. Simply multiplying 0.25% by 52 gives 13.00%, which ignores compounding, while using the wrong number of periods overstates the result.
- A13.00%
- B13.87%Correct
- C14.15%
Explanation
Annual return = (1.0025)^52 - 1. ln(1.0025) = 0.0024969, times 52 = 0.12984, and e^0.12984 = 1.1387, so the return is 13.87%. Simple multiplication gives 13.00%, and using 53 periods gives 14.15%.
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