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CFA Level I · CFA Level I Exam · Types of Financial Returns

Compared with simple returns, continuously compounded returns are most likely to be preferred for multi-period analysis because they:

Continuously compounded returns are preferred for multi-period work because the return over several periods is just the sum of the single-period log returns. Simple returns require geometric linking. The size comparison with simple returns holds only for positive returns.

  1. Aare always smaller in magnitude
  2. Baggregate across periods by simple additionCorrect
  3. Cequal the arithmetic average of cross-sectional asset returns

Explanation

Log returns are time-additive: the multi-period log return equals the sum of single-period log returns. Simple returns must be compounded geometrically. Log returns are smaller than simple returns only for positive returns, and they are not additive across assets in a portfolio.

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