Quant Help

CFA Level I Quant
#1

Can someone help explain the concepts behind this better? I feel like these are basic things that I’m not thinking through correct. For the first question I wanted to calculate the annual rate of return as (103 / 90)1/5 – 1 not (103 / 90)1/4 – 1.

For the second question I’m performing the calculation of $3000 X (1+15%)^5 but end up with the answer $6,030 not the correct answer. There has to be something that’s not clicking for me here. Thank you for the help.

QUESTIONS

Over the next 5 years, MT Technologies expects to earn the following amounts:

Year 1

$90 million

Year 2

$76 million

Year 3

$92 million

Year 4

$105 million

Year 5

$103 million

The annually compounded growth rate based on the company’s forecasts is closest to:

7.96%

2.74%

3.43%

You Answered Correctly!

Annual rate of return = (103 / 90)1/4 – 1 = 3.43%

Mary invested $3,000 in an account with an interest rate of 15% compounded continuously. After 5 years, the value of her investment will be closest to:

$6,351

$6,030

$6,240

You Answered Correctly!

FV= PVert

PV = −$3,000; r = 0.15; t = 5

FV = $6,351

#2

  1. Assume all CFs occur at the same point of the year. There will be exactly 4 years between year 1 and year 5

  2. Since compounding is continuous, you have no choice but to use ert. If compounding was annual, then you would use 1.155.

#3

  1. the problem is that the period starts at year 1 instead of year 0. if it’s year 0 up to year 4, it would be more intuitive.

  2. continuous compounding employs the natural exponential number