Annualized Return
Definition
The geometric average return per year over a multi-year period, accounting for compounding.
Explanation
Annualized return converts any holding period return into an equivalent yearly rate. This is essential for comparing investments held for different periods. A 50% cumulative return over 3 years is not 16.7% per year (simple average) — it's 14.5% annualized because returns compound. The formula uses geometric averaging to capture this compounding effect.
Formula
Annualized Return = (1 + Total Return)^(1/years) - 1
Example
A portfolio returned 50% cumulatively over 3 years.
(1 + 0.50)^(1/3) - 1 = 1.1447 - 1 = 14.47%
The portfolio earned 14.47% per year on a compounded basis — less than the 16.7% simple average.
How Stoquity Uses This
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