HKSI Paper 12 Basic theoretical aspects of portfolio management question: effective annual rate

Answer: C. 19.56%

The monthly rate is 1.5%, so the nominal annual rate is 12 × 1.5% = 18%. The effective annual rate compounds the monthly rate twelve times: (1.015)^12 − 1 = 19.56%. 18.00% is the nominal rate, which ignores compounding. 18.81% and 19.25% are what a nominal 18% a year gives with semi-annual compounding, (1.09)^2 − 1, and quarterly compounding, (1.045)^4 − 1; monthly compounding gives more than both. Source: Standard investment mathematics: effective annual rate = (1 + r ÷ m)^m − 1 (as at October 2026).