Reading 25, EOC 12B
I’ve searched the forums and seems like this question has confused a lot of people over the years.
However I have a minor question that may or may not be relevant for the test but it is just annoying me:
Why is the 5% hurdle rate (tucked away in a footnote) not geometrically reduced to the monthly rate? Why did they just divide by 12, instead of 1.05^(1/12) - 1? I have been looking at this question for a while so I may be going crazy, but in my mind I’m thinking, is it because the hurdle rate is not invested, so it doesn’t actually compound, or is it just inconsistency on the author’s part? All the answers are compounded from monthly to annual, and more… (a search for 0.6133% in the forums will get you some background).
Thanks in advance.
