For log normally distributed returns, annual compound returns equal
A)the arithmetic average return minus half the variance.
B)the arithmetic average return plus half the variance.
C)the arithmetic average return minus half the standard deviation.
D)the arithmetic average return plus half the standard deviation.

Question

Quizplus · Accepted Answer

For log-normally distributed returns, the annual compound return equals the arithmetic average return minus half the variance. This is because the compound return is adjusted for the volatility drag, which is represented by subtracting half the variance of the returns.

For Log Normally Distributed Returns, Annual Compound Returns Equal