8006 Exam Dumps | Continuously compounded returns for an asset that increases in price from S1 to S2 over time period t

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
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Question 11/101

Continuously compounded returns for an asset that increases in price from S1 to S2 over time period t (assuming no dividends or other distributions) are given by:

A. exp(S2/S1 - 1)*t

B. (S2 - S1) / S1

C. ln(S2/S1 - 1)

D. ln(S2/S1)

Correct Answer: D

Explanation
Choice 'd' is the correct answer. Continuously compounded returns are given by the log of S2/S1. The expression (S2 - S1)/S1 gives discrete returns, not continuously compounded returns.
Note that the question is only asking for the return over the given time period, not annualized returns. So t is not relevant here. If we had to find annualized returns, and t were expressed in years, then the annualized return would have been (1/t)*ln(S2/S1).
Also refer to the tutorial on interest rates and compounding for more information on continuously compounded rates.

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