CFA Level I · CFA Level I Exam · Types of Financial Returns
An investment returns 6.0% over the first year and 8.0% over the second year. The holding period return over the two years is closest to:
The two-year holding period return is 14.48%. Returns are linked geometrically, so 1.06 times 1.08 equals 1.1448. Adding 6% and 8% gives 14%, which ignores the return earned on the first year's gain.
- A14.00%
- B14.48%Correct
- C15.20%
Explanation
Multi-period HPR compounds: (1.06)(1.08) - 1 = 1.1448 - 1 = 14.48%. Simply adding the returns gives 14.00%, which ignores compounding on the first year's gain.
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