Page 103 - FINAL CFA SLIDES DECEMBER 2018 DAY 3
P. 103
Session Unit 3:
10. Common Probability Distributions
LOS 10.o: Distinguish between discretely and continuously compounded rates of return and calculate and
interpret a continuously compounded rate of return, given a specific holding period return, p. 233
Continuous compounded Rates of Returns are additive for multiple periods…so what?
In general, the holding period return after T years, when the annual continuously
compounded rate is Rcc, is given by:
Given investment results over a 2-year period, we can calculate the
2-year continuously compounded return and divide by two to get
the annual rate.
Consider an investment that appreciated from $1,000 to $1,221.40
over a 2-year period.
The 2-year continuously compounded rate is ln(1,221.40 / 1,000) = 20%,
and the annual continuously compounded rate (Rcc) is 20% / 2 = 10%.
