Annualized Total Return
An annualized total return is the geometric average amount of money earned by an investment each year over a given time period. The annualized return formula is calculated as a geometric average to show what an investor would earn over a period of time if the annual return was compounded.An annualized total return provides only a snapshot of an investment's performance and does not give investors any indication of its volatility or price fluctuations.
Definition: Annualized total return refers to the average amount of money earned per year over a given period of time. It is calculated using the geometric mean to show how much an investor can earn over a period of time if the annual return rate is compounded. Annualized total return only provides a snapshot of investment performance and does not give any indication of its volatility or price fluctuations.
Origin: The concept of annualized total return originated from the need in financial markets for a standardized way to compare the performance of different investments. As financial markets developed, particularly in the mid-20th century, annualized total return gradually became an important metric for measuring investment returns.
Categories and Characteristics: Annualized total return can be divided into nominal annualized total return and real annualized total return. Nominal annualized total return does not take into account the effects of inflation, while real annualized total return does. Nominal annualized total return is suitable for short-term investment analysis, while real annualized total return is more suitable for long-term investment analysis. The main characteristic of annualized total return is that it provides a standardized investment return rate, making it easier to compare different investments.
Specific Cases: Case 1: Suppose an investor invested $10,000 at the beginning of 2019, and by the beginning of 2024, this investment grew to $15,000. The formula for calculating the annualized total return rate is:
Annualized Total Return Rate = [(15000 / 10000)^(1/5) - 1] * 100% ≈ 8.45%.
Case 2: Another investor invested $20,000 at the beginning of 2018, and by the beginning of 2024, this investment grew to $26,000. The formula for calculating the annualized total return rate is:
Annualized Total Return Rate = [(26000 / 20000)^(1/6) - 1] * 100% ≈ 4.64%.
Common Questions: 1. Does annualized total return consider the risk of the investment?
Answer: Annualized total return only provides a snapshot of investment performance and does not consider the risk or volatility of the investment.
2. What is the difference between annualized total return and compound return?
Answer: Annualized total return is a form of compound return, calculated using the geometric mean to show the effect of compounding.
