Explanation:
Simple returns are the difference between an actual and previous price, divided by the previous price. Continuous returns are the difference between the log prices of current and previous prices. So for the former, , and for the latter, . One hint as to whether calculations are correct is to compare simple to continuous. Simple returns are larger than continuous.
(Book 2, Module 23.1, LO 23.a)
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Question 75
A trader is trying to master return calculations before moving forward to more challenging exercises. He has been instructed to understand the difference between simple returns and continuously compounded returns. As a check on his understanding, the trader's supervisor asks him to calculate the simple and continuously compounded returns for a stock whose current latest price is 50, with a previous price of 45. Which of the following represents the simple and continuously compounded returns, respectively, for that stock information?
A
, .
B
$11.11%10.54`%$.
C
$10%12.82`%$.
D
$12.82%10`%$.
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