Saturday, January 1, 2011

Annualised Return

An annualised return is an investment's return over a certain period, converted to an annual rate. The most simplistic way of doing this is to multiply the return from a period e.g. 4% during a quarter, by the number of times that period occurs in a year e.g. 4 times 4% = 16%. Another more accepted method is to generate a compounded growth rate, in this way you still use the number of periods, however you need to use the following formula Ra = (1+Rp)^t  where Ra is the annualised return, Rp is the return from the period, and t is the number of compounding periods; using the same numbers from the previous example - Ra = (1+0.04)^4 = 16.986%. Using an annualised return can be useful for getting an indication of what the overall return for the year might be if performance continues at the same level - however this is often an erroneous assumption.

Synonyms: Compound annual return, Compounded return, Annualized Return

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