The return on an investment generated over a year and calculated as a percentage of the initial amount of investment Show What is Annual Return?The annual return is the return on an investment generated over a year and calculated as a percentage of the initial amount of investment. If the return is positive (negative), it is considered a gain (loss) on the initial investment. The rate of return will vary depending on the level of risk involved. Summary
Annual Return FormulaThe return earned over any 12-month period for an investment is given by the following formula: All the interest and dividends received during the 12-month period should be included in the final value of the investment. Annual Return ExampleAssume that you purchased 200 shares at a price of $10 each. You receive $1 in cash dividends after one year, and the share now trades at $9.50. How can you evaluate the performance of the investment that you made a year ago? It is reasonable to say that the investment can be deemed profitable if the return is positive. Let’s calculate the annual return. In our example: 1. Initial value of the investment Initial value of the investment = $10 x 200 = $2,000 2. Final value of the investment At the end of one year, you will hold cash from dividends and 200 shares trading at $9.50. Hence, Cash received as dividends = $1 x 200 = $200 Current value of shares = $9.50 x 200 = $1,900 Final value of the investment = $200 + $1,900 = $2,100 3. Annualized rate of return Annualized ReturnIn the above example, we calculated the return on the investment over a single period of 12 months. However, in practicality, you invest your money in different assets with different time periods. To compare the returns on such investments with a one-year return, you need to annualize them. The rate of return per year, measured over a period either longer or shorter than a year, is known as the annualized return. The annualized return incorporates compounding; therefore, it is also known as the Compound Annual Growth Rate (CAGR). Annualized Return FormulaThere are two options for calculating the annualized return depending on the available information. Option 1: When you are given the annual returns for each year of the investment period, then: Where:
For example, assume that you purchased 200 shares at a price of $10 each, and you decided to hold onto the shares for three years. The stock rises 10% in the current year, increases by 14% next year, and falls by 15% in the year after. What is the rate of return during the three years that you’ve owned the shares? Here, R1 = 15%, R2 = 14%, and R3 = -10% Therefore, you realized an annual return of 5.67% on your investment. Option 2: When are given a dollar value of returns instead of an annual rate of returns, then: Where:
For example, assume that you purchased 200 shares at a price of $10 each, and you decided to hold onto the shares for three years. You receive $1 per share in cash dividends per year. After three years, you decide to sell all the shares at $12. What is the rate of return during the three years that you’ve owned the shares? Note that the dollar value of the investments is given here. 1. Initial value of the investment Initial value of the investment = $10 x 200 = $2,000 2. Final value of the investment Cash received as dividends over the three-year period = $1 x 200 x 3 years = $600 Value from selling the shares = $12 x 200 = $2,400 Final value of the investment = $600 + $2,400 = $3,000 3. Annualized rate of return Therefore, you realized an annualized return of 14.47% on your investment. Additional ResourcesThank you for reading CFI’s guide on Annual Return. To keep learning and advancing your career, the following resources will be helpful:
How do you convert annualized return?Converting other returns to annual
Simply replace the 365 with the appropriate number of return periods in a year. So, for weekly returns, you would raise the daily return portion of the equation to the 52nd power. For monthly returns, you would use 12. And, for quarterly returns, you would use the fourth power.
How is monthly return calculated?Take the ending balance, and either add back net withdrawals or subtract out net deposits during the period. Then divide the result by the starting balance at the beginning of the month. Subtract 1 and multiply by 100, and you'll have the percentage gain or loss that corresponds to your monthly return.
How do you calculate ROI for monthly investment?ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
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