Annualized Rate of Return is a metric used to compare the profitability of different investments over different time frames. It gives you one number to directly compare to another number that shows how profitable an investment is over a given 12 month period.
This makes the most sense for investors with diverse portfolios, and especially those with volatile investments. Returns on stocks, for example, can be a 15% gain one year and a 25% loss the next. Putting the annualized rate of return next to an investment allows you to easily see which investments are underperforming and which ones are performing well. With many investments only showing a dollar amount and an unclear rate of return, annualized rate of return also helps to show a consistent percentage.
How Is Annualized Rate of Return Calculated?
Annualized Rate of Return is shown as the Ending Value of an Investment divided by the Beginning Value to the power of 1 divided by the number of years, which is then subtracted by 1. When you multiply that result by 100, you get the Annualized Rate of Return as a percentage, which can be directly compared to other investments.
LRSCPA has an annualized rate of return calculator for investors to accurately assess their portfolio.