CFA Level I · CFA Level I Exam · Returns of Financial Assets and Instruments
An investment grows from 100 to 121 over two years with a first-year return of 10%. Assuming no cash flows, the second-year return is most likely:
The second-year return is 10.0%. The value after year one is 110, and growth from 110 to 121 is 11 on 110, or 10%. The 21% figure is the cumulative two-year return, not the annual return.
- A10.0%Correct
- B11.0%
- C21.0%
Explanation
After year one the value is 110. The second-year return is 121/110 − 1 = 10.0%. The 21.0% option is the two-year cumulative return, and 11.0% wrongly subtracts the first-year return from the total.
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