Contents
Annualized Total Return
> Introduction to Annualized Total Return

### What is the definition of annualized total return?

The annualized total return is a financial metric used to measure the performance of an investment over a specific period of time, typically expressed as an annual percentage. It takes into account not only the capital appreciation or depreciation of the investment but also any income generated from it, such as dividends or interest.

To calculate the annualized total return, one must consider the initial investment value, the final investment value, and the time period over which the investment was held. The formula for calculating the annualized total return is as follows:

Annualized Total Return = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] - 1

This formula raises the ratio of the ending value to the beginning value to the power of 1 divided by the number of years. The result is then subtracted by 1 to express the return as a percentage.

For example, let's say an individual invests \$10,000 in a mutual fund and holds it for five years. At the end of the five-year period, the investment has grown to \$15,000. To calculate the annualized total return, we would use the formula:

Annualized Total Return = [(15,000 / 10,000) ^ (1 / 5)] - 1

Simplifying this equation, we find:

Annualized Total Return = (1.5 ^ 0.2) - 1

Using a calculator, we determine that 1.5 raised to the power of 0.2 is approximately 1.095. Subtracting 1 from this value gives us an annualized total return of 0.095, or 9.5%.

The annualized total return provides investors with a standardized measure to compare the performance of different investments over various time periods. It allows for a more accurate assessment of investment performance by considering both capital gains and income generated. By annualizing the return, it also enables investors to easily compare the performance of investments with different holding periods.

It is important to note that the annualized total return assumes that any income generated from the investment is reinvested. This assumption allows for a more realistic representation of the investment's growth potential. Additionally, the annualized total return does not take into account any fees or expenses associated with the investment, which can impact the actual return experienced by an investor.

In conclusion, the annualized total return is a valuable metric for evaluating the performance of an investment over a specific period of time. By considering both capital gains and income generated, it provides investors with a comprehensive measure of investment performance.