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Chartered Financial Analyst Level 1

Chartered Financial Analyst Level 1

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An analyst gathers the following information about a security index: Period Return (%) 1 12 2 -8 3 2 If the index's value is 100 at the beginning of Period 1, the index's value at the end of Period 3 is closest to:

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Explanation:

Explanation:

To determine the index's value at the end of Period 3, the returns must be compounded over the three periods. The correct calculation is as follows:

  1. Period 1: 100×(1+12%)=112100 \times (1 + 12\%) = 112100×(1+12%)=112
  2. Period 2: 112×(1−8%)=103.04112 \times (1 - 8\%) = 103.04112×(1−8%)=103.04
  3. Period 3: 103.04×(1+2%)≈105.10103.04 \times (1 + 2\%) \approx 105.10103.04×(1+2%)≈105.10

The closest value to 105.10 is 105, which corresponds to option B.

  • Option A (103) is incorrect because it represents the value at the end of Period 2, not Period 3.
  • Option C (106) is incorrect because it assumes the returns are added rather than compounded, leading to an inaccurate result.
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