Chartered Financial Analyst (CFA) Practice Exam Level 2

In commodities and futures contracts, how is Price Return calculated?

1. (Current Price + Previous Price) / Previous Price

2. (Current Price - Previous Price) / Previous Price

3. (Previous Price - Current Price) / Current Price

4. (Current Price x Previous Price) - Previous Price

The correct answer is: (Current Price - Previous Price) / Previous Price

The calculation of Price Return is essential for understanding how a commodity or futures contract has performed over a specific time period. It measures the percentage change in price from one period to another, reflecting the actual price gain or loss. The formula used to calculate Price Return is (Current Price - Previous Price) / Previous Price. This calculation captures the change in price (Current Price minus Previous Price) and then expresses that change as a proportion of the Previous Price. This is important because it standardizes the return relative to the prior value, allowing for a clear understanding of price movement over time. In this context, other methods of calculation might yield different types of information, but they do not accurately represent the Price Return. For example, adding prices together or multiplying them, as suggested in some alternatives, does not provide insight into how much the price has changed relative to its starting point. Price Return is specifically focused on measuring the percentage change, making the method outlined above the most appropriate in this context.