1. What is Annualized Return?

Annualized return is the geometric average amount of money earned by an investment each year over a given time period. It shows what an investor would earn over a period of time if the annual return was compounded.

2. How Does the Calculator Work?

The calculator uses the annualized return formula:

Where:

• \( R_i \) — Monthly return for month i (in decimal)
• \( n \) — Number of months
• \( \prod \) — Product of all monthly returns

Explanation: The formula compounds the monthly returns and then annualizes them by raising to the power of (12/number of months).

3. Importance of Annualized Return

Details: Annualized return allows comparison of investments over different time periods. It accounts for compounding and provides a standardized measure of performance.

4. Using the Calculator

Tips: Enter monthly returns as decimals (e.g., 0.05 for 5%), separated by commas. Enter the number of months. All values must be valid (returns > -1, months ≥1).

5. Frequently Asked Questions (FAQ)

Q1: Why use annualized return instead of simple average?
A: Annualized return accounts for compounding effect, while simple average does not. It provides a more accurate measure of investment performance.

Q2: What's the difference between annualized and cumulative return?
A: Cumulative return shows total growth over the period, while annualized return shows the equivalent yearly rate that would produce that growth.

Q3: When is annualized return most useful?
A: When comparing investments with different time periods or when evaluating performance over partial years.

Q4: Are there limitations to annualized return?
A: It assumes returns can be compounded and may not reflect actual year-to-year volatility. It works best for consistent return patterns.

Q5: How does this differ from APR?
A: APR is typically a simple interest rate, while annualized return accounts for compounding and is used for investment performance measurement.