Dear Julio,
I have a quick question regarding Task 1 of Exercise Set 4 on the Risk & Return topic.
In this specific case, why didn’t we use the formula (1 + average quarterly return)^4 - 1 to calculate the annualized quarterly return? Instead, the solution simply multiplied the average quarterly return by 4. Wouldn’t this method ignore the compounding effect over the quarters?
Is there a specific rule for when to include compounding when calculating the annualized return and when it can be omitted?
Thank you in advance for your clarification!
Best regards,
Alois