Financial Risk Manager Part 1

Financial Risk Manager Part 1

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The prices of a portfolio at different times are as shown in the table below.

TimePrice
0105.62
1104.10
2105.54
3103.68
4103.56

What is the value of continuously compounded return at time 4?

TTanishq

Explanation:

The continuously compounded return is calculated using the formula:

rt=ln⁡Pt−ln⁡Pt−1r_t = \ln P_t - \ln P_{t-1}

For time 4: r4=ln⁡P4−ln⁡P3=ln⁡103.56−ln⁡103.68r_4 = \ln P_4 - \ln P_3 = \ln 103.56 - \ln 103.68

Calculating the values:

  • \ln 103.56 ≈ 4.640
  • \ln 103.68 ≈ 4.641

Therefore: r4=4.640−4.641=−0.0012r_4 = 4.640 - 4.641 = -0.0012

The correct answer is D (-0.0012), which represents the continuously compounded return from time 3 to time 4._

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