A stock provides an expected return of 10% per year and has a volatility of 20% per year.What is the expected value of the continuously compounded return in one year?
A) 6%
B) 8%
C) 10%
D) 12%

Question

Quizplus · Accepted Answer

The expected value of the continuously compounded return is calculated by adjusting the expected return for the volatility using the formula: expected continuously compounded return = expected return - (volatility^2 / 2). Here, it is 10% - (0.2^2 / 2) = 10% - 2% = 8%.

A Stock Provides an Expected Return of 10% Per Year