Quant ~HPR v/s continuously compounded return.

[RDX]

When a stock increases in value, the holding period return is always greater than the continuously compounded return.

How?

Q => A stock was purchased for $100 and sold one year later for $120.Calculate the investor's annual rate of return on a continuously compounded basis.

So HPR = 120-100/100 = 20 %

and continuously compounded return => ln(120/100) = 18.232 %

so if I calculate I/Y,Using TVM I get I/Y = 20%

why can't I calculate rate of return using TVM?

or I failed to understand the language of the question?
by "investor's annual rate of return" it means stated annual rate of return and effective annual rate can be calculated by e^.18232-1 ?

 

[tmackenz]

HPR and CCR are not the same....
getting 20% using TVM is fine if that's what the question asks, these are just two different methods to get the return, just like there is also the BEY and MMY, they are all fine to use in differing situations

 

[maratikus]

never mind ... easier to explain than use formulas

look at two periods.

compounded:
start with 100, made 10% -> 110
make 10% more -> 121
total 20%

simple return (121-100)/100 = 21%



Edited 2 time(s). Last edit at Thursday, September 25, 2008 at 03:05PM by maratikus.