What is the primary difference between simple interest and compound interest?

Simple interest is calculated on the principal amount only, while compound interest is calculated on both the principal and accumulated interest. Simple interest is paid annually, while compound interest is paid monthly. Simple interest is used for personal loans, while compound interest is used for business loans. Simple interest rates are fixed, while compound interest rates are variable.

Which of the following best describes the concept of compounded returns?

Profits earned are withdrawn each year. Profits earned are reinvested to generate further returns. Returns are calculated based on the initial investment amount only. Returns are guaranteed to be positive every year.

When is it appropriate to use the absolute return method to measure investment returns?

When the investment horizon is less than a year. When the investment horizon is more than a year. When the investment involves stocks. When the investment involves bonds.

What does CAGR stand for in the context of investment returns?

Compounded Annual Growth Rate Capital Asset Growth Rate Current Annual Gain Ratio Consistent Annual Return

According to the text, what is a key factor that contributes to the effectiveness of compounding?

Time Interest rate Principal amount Frequency of interest payments