Annualized Rate - Explained
What is an Annualized Rate?
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Table of ContentsWhat is an Annualized Rate?How Does an Annualized Rate Work?Calculating Annualized RateExample Academics Research on Annualized Rate
What is an Annualized Rate?
An annualized rate is a computed annual rate of return that an investor gets over a certain period. The Global Investment Performance Standards dictate that portfolios returns may not be annualized. It prevents the performance that has been projected in the remainder of the year from happening.
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How Does an Annualized Rate Work?
The scaling of annualized returns takes place within a limited period of 12 months. The process enables investors to objectively compare any assets returns over a certain period of time. The annualized rate occurs for a certain period of time (less than 12 months). It is an annual returns rate estimation that is mathematically extrapolated. To calculate it, you have to multiply the change of returns rate in a single month by 12 to be able to get the years rate.
Calculating Annualized Rate
To compute an investments index or annualized performance using yearly data, you are required to use the following points: P = Initial investment or principal G = losses or gains n = number of years AP = annualized performance rate The generalized formula that takes into account compound interest over time, is as follows: AP = ((P + G) / P) ^ (1 / n) - 1
Lets assume, for instance, that 0.21% is one months rate of return, and 0.29% is for the month that follows. In this case, the change in the rate of return from one month to the other will be 0.08% or (0.29-0.12). In this case, the annualized rate of return will be equal to 0.08% x 12 = 0.96%. Generally, investors making investments, are supposed to place their money in any of the different assets range and earn returns for a different time. They can invest in stock shares and withdraw after 5 years. Another option will be to purchase a treasury bill that has a maturity date of 3 months after purchase. In order to compare various investments, investors need to annualize them. It is simple for those investors who are already receiving annual returns on their investments.