Continuous compounding

What it means

Compounding over infinitely small intervals. The limit of periodic compounding as the number of periods per year goes to infinity.

The exam angle

The default convention in derivatives pricing and in most FRM formulas, which is why the same position can look differently priced in two parts of the curriculum.

Where it appears in the syllabus

• Quantitative MethodsCFA Level I · exam weight 11–14% · Returns and benchmarks, time value, distributions, portfolio maths, regression.
• Quantitative AnalysisFRM Part I · exam weight 20% · Probability, hypothesis testing, regression, time series, volatility, simulation.
• Valuation & Risk ModelsFRM Part I · exam weight 30% · VaR and ES, option valuation, bond risk, stress testing, credit and op risk.

Related terms

• Arithmetic meanThe sum of the observations divided by their number.
• BootstrapResampling the observed data with replacement to estimate the sampling distribution of a statistic, without assuming a…
• Central limit theoremFor a large enough sample, the distribution of the sample mean approaches normal regardless of the shape of the…
• Coefficient of determinationThe fraction of the dependent variable’s variation explained by the regression.
• Confidence intervalA range that will contain the true parameter in a stated proportion of repeated samples.
• CorrelationCovariance divided by the product of the two standard deviations, giving a unit-free number between −1 and +1.