Annual Return
The annual return is the return that an investment provides over a period of time, expressed as a time-weighted annual percentage. Sources of returns can include dividends, returns of capital and capital appreciation. The rate of annual return is measured against the initial amount of the investment and represents a geometric mean rather than a simple arithmetic mean.
Definition: Annual Return refers to the return provided by an investment over a one-year period, expressed as a time-weighted annual percentage. The sources of return can include dividends, capital returns, and capital appreciation. The calculation of the annual return is compared to the initial amount of the investment and represents the geometric mean rather than the simple average.
Origin: The concept of annual return originated with the development of financial markets, particularly in the early 20th century, as the stock market and investment funds emerged. Investors needed a standardized way to measure investment performance, and the annual return gradually became an important indicator of investment returns.
Categories and Characteristics: Annual returns can be divided into nominal annual returns and real annual returns. Nominal annual returns do not consider the impact of inflation, while real annual returns do. Nominal annual returns are easier to calculate, but real annual returns better reflect the true earnings of an investment. Characteristics of annual returns include: 1. Time-weighted: considers the performance of the investment at different points in time; 2. Geometric mean: avoids the potential misleading nature of simple averages.
Specific Cases: Case 1: Suppose you invested 10,000 yuan in a stock at the beginning of 2020, and by the end of 2021, the stock's value had grown to 12,000 yuan, and you also received 200 yuan in dividends. The annual return is calculated as follows: Annual Return = [(12000 + 200) / 10000]^(1/1) - 1 = 0.22, or 22%. Case 2: You invested 5,000 yuan in a fund at the beginning of 2019, and by the end of 2021, the fund's value had grown to 6,500 yuan, and you also received 300 yuan in dividends. The annual return is calculated as follows: Annual Return = [(6500 + 300) / 5000]^(1/2) - 1 = 0.16, or 16%.
Common Questions: 1. What is the difference between annual return and annualized return? Annual return refers to the return for a specific year, while annualized return refers to the average annual return over multiple years. 2. Why does the annual return use the geometric mean? The geometric mean considers the effect of compounding, which more accurately reflects the actual earnings of an investment.
