Lessons
- What is a Probability Distribution
- Discrete Vs. Continuous Random Variable
- Cumulative Distribution Function
- Discrete Uniform Random Variable
- Bernoulli and Binomial Distribution
- Stock Price Movement Using a Binomial Tree
- Tracking Error and Tracking Risk
- Continuous Uniform Distribution
- Normal Distribution
- Univariate Vs. Multivariate Distribution
- Confidence Intervals for a Normal Distribution
- Standard Normal Distribution
- Calculating Probabilities Using Standard Normal Distribution
- Shortfall Risk
- Safety-first Ratio
- Lognormal Distribution and Stock Prices
- Discretely Compounded Rate of Return
- Continuously Compounded Rate of Return
- Option Pricing Using Monte Carlo Simulation
- Historical Simulation Vs Monte Carlo Simulation
Discretely Compounded Rate of Return
A discretely compounded rate of return is simply a compounded rate of return with a discrete compounding frequency such as daily, monthly, quarterly, or semi-annually.
As the frequency of compounding increases, the annual effective yield also increases because the interest or income earned is compounded more frequently.
Example
Suppose an investment grows at an annual rate of 10% compounded quarterly. At the end of one year, the investment will grow to:
The effective annual yield is given as:
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