Answer: The volatility of the annual returns is 15.6%.

## Explanation **Correct Answer: C** This question involves converting monthly volatility to annual volatility using the square root of time rule. ### Calculation: - Monthly volatility (σ_monthly) = 4.5% = 0.045 - Number of months in a year = 12 - Annual volatility (σ_annual) = σ_monthly × √12 - σ_annual = 0.045 × √12 = 0.045 × 3.464 = 0.1559 ≈ 15.6% ### Why other options are incorrect: **A and B are incorrect:** These refer to "implied volatility," which is derived from option prices and market expectations, not from historical return data. Implied volatility is forward-looking, while the question provides historical data. **D is incorrect:** This option incorrectly scales volatility linearly by multiplying 4.5% by 12 (0.045 × 12 = 0.54 = 54%), rather than using the square root of time rule. Volatility scales with the square root of time, not linearly. ### Key Concept: The square root of time rule states that volatility scales with the square root of the time period when returns are independent and identically distributed (i.i.d.). This is a fundamental principle in quantitative finance for converting volatility across different time horizons.

Author: LeetQuiz .