Annualized Rate of Return

The annualized rate of return is a measure of the average return on an investment over a period of one year. It is calculated by taking the total return on the investment over the period and dividing it by the number of years in the period.

The annualized rate of return is a useful tool for comparing investments with different time horizons. For example, an investment that returns 10% over two years has a higher annualized rate of return than an investment that returns 5% over one year.

The annualized rate of return can also be used to compare investments with different levels of risk. For example, an investment that has a high annualized rate of return but also a high level of risk may not be as attractive as an investment with a lower annualized rate of return but a lower level of risk.

It is important to note that the annualized rate of return is only an estimate of the future return on an investment. The actual return on an investment may be higher or lower than the annualized rate of return.

The annualized rate of return is calculated using the following formula:

Annualized rate of return = (Ending value - Beginning value) / Beginning value * (1 / Number of years)

For example, if an investment has an ending value of $100 and a beginning value of $50, and the investment is held for two years, the annualized rate of return is:

(100 - 50) / 50 * (1 / 2) = 20%

The annualized rate of return is a useful tool for comparing investments, but it is important to remember that it is only an estimate of the future return on an investment.