Annualized return is a return which investor earns on its investment each year over a given period. In other words, it simply measures an investment’s performance on a yearly basis and tells about how much investors will earn on their returns over the given period. It just shows the performance of the investment without giving any indication of the investment’s volatility or movement. If investors want to know how much its investments have incurred over the period, then he should look at its annualized returns.
How to Calculate Annualized Returns
Whenever investors make investments, they put their money in different assets for diversification and earn returns for different time zone. Suppose an investment of $1,500 was made four years ago and now it has grown to $1,850. In this case, the annualized returns will be 5.38 percent. Let assume that the investment has been growing at a constant rate, then the investment of $1,500 would have grown to $1,580.7 (end of the first year). At the end of the second year, the investment would have been $1,665.7, and so on, at the end of the fourth year, the investment will appreciate to around $1,850. Annualized returns compute as follows:
Annualized Return = [(1+ R) ^ 365/days held -1]
R = Cumulative Rate of return
Let’s have a look at returns for the different time period, i.e., Quarterly, Monthly, Weekly, and Daily:
- Quarterly Returns – Now we assume that an investor has 4% quarterly returns and we know that in a year we have four quarters, then the annual returns will be:
Annualized returns = [(1+0.04) ^365/90 – 1] = 17.2%
- Monthly Returns – Now we assume that an investor has 1.5% monthly returns and we know that in a year we have 12 months, then the annual returns will be:
Annualized Returns = [(1+0.015) ^365/30 – 1] = 19.9%
- Weekly Returns – Now we assume that an investor has 0.6% weekly returns and we know that in a year we have 52 weeks, then the annual returns will be:
Annualized Returns = [(1+0.006) ^365/7 – 1] = 36.6%
- Daily Returns – Now we assume that an investor has 0.15% daily returns and we know that in a year we have 365 days, then the annual returns will be:
Annualized Returns = [(1+0.0015) ^365/1 -1] = 72.8%
- 200 Days Returns – In this, we can calculate returns on any number of days and convert it into an annualized return. Now we assume that an investor has 7% returns over 200 days. Then the annual returns will be:
Annualized Returns = [(1+0.07) ^ (365/200)- 1] * 100 = 13.1%
Annualized return has one limitation i.e. if the investor wants to reinvest the return which is generated from the portfolio at the same rate, he/she might not get the same return. Suppose an investor earned 4% in a quarter and want to replicate the same return over the next quarter, he/she might not be able to replicate these returns due to the volatility or uncertainty within the market.
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