Annualized Rate – Definition

Cite this article as:"Annualized Rate – Definition," in The Business Professor, updated April 7, 2020, last accessed August 9, 2020, https://thebusinessprofessor.com/lesson/annualized-rate-definition/.

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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.

A Little More on What is an Annualized Rate

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 return’s rate in a single month by 12 to be able to get the year’s rate.

Calculating Annualized Rate

To compute an investment’s 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

Example

Let’s assume, for instance, that 0.21% is one month’s 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.

Reference for Annualized Rate

https://www.readyratios.com/reference/analysis/annualized_rate.html

https://www.investopedia.com › Investing › Investing Strategy

https://www.readyratios.com/reference/analysis/annualized_rate.html

www.businessdictionary.com/definition/annualized-rate.html

https://smallbusiness.chron.com › Money & Debt › Calculate Interest Rates

Academics research on “Annualized Rate”

Interest rate volatility, capital controls, and contagion, Edwards, S. (1998). Interest rate volatility, capital controls, and contagion (No. w6756). National Bureau of Economic Research. Current debates on globalization have tended to focus on financial market volatility and contagion. In fact, many proponents of the imposition of some form of capital restrictions in emerging markets have argued that these would help reduce or even eliminate spillover across emerging market. Although this has been an old concern among developing economies, it has become more generalized after the Mexican, East Asian and Russian crises. In this paper I use high frequency data on short term nominal interest rates during the 1990s in three Latin American countries Argentina, Chile and Mexico — to analyze whether there has been volatility contagion from Mexico to the two South American nations. The results obtained from the estimation of augmented GARCH equations indicate, quite strongly, that while there has been volatility contagion from Mexico to Argentina, there has been no volatility contagion from Mexico to Chile. These results also indicate, however, that with the exception of a brief period in 1995, nominal interest rates have been more volatile in Chile than in Argentina. The results reported in this paper also indicate that interest rate differentials with respect to the US have tended to disappear somewhat slowly in both Chile and Argentina. Moreover, the estimation of rolling regressions for Chile indicate that after capital controls on capital inflows were imposed, interest rate differentials became more sluggish and tended to disappear more slowly than during the free capital mobility period.

Annualized Returns of Venture-Backed Public Companies Categorized by Stage of Financing: An Empirical Investigation of IPOs in the Last Three Decades, Shachmurove, Y. (2001). Annualized Returns of Venture-Backed Public Companies Categorized by Stage of Financing: An Empirical Investigation of IPOs in the Last Three Decades. The Journal of Entrepreneurial Finance6(1), 44-58. Although the national media has given increased attention to the venture capital process, misconceptions continue to proliferate. One often hears about the incredible capital gains of IPO share prices. This paper refutes the myth that investors demand very high rates of return to compensate for the risks involved in financing ventures. The paper investigates actual performance of 3,063 Initial Public Offerings of companies that were backed by venture capital from 1968 until 1998 stratified by current actively and inactively traded companies and by stages of financing. The main findings are that annualized returns are different for current actively and inactively traded firms and for many of the stages of financing but that they are much lower than the ones reported by the media and the venture capital literature.

Monetary policy during the transition to a floating exchange rate: Brazil’s recent experience, Fraga, A. (2000). Monetary policy during the transition to a floating exchange rate: Brazil’s recent experience. Finance and Development37(1), 16. 

Finance and growth in economies in transition, Coricelli, F. (1996). Finance and growth in economies in transition. European Economic Review40(3-5), 645-653. The paper presents an analytical discussion and empirical evidence on the adjustment of financial markets to the stabilization and reforms implemented in a transition economy, emphasizing the role of liquidity constraints. Different types of equilibria, associated with different financial structures, can emerge after reforms. The paper argues that a key role during the transition is played by private, trade credit markets. The functioning of the latter requires the existence of a minimum set of market institutions, that can impose credible penalties and rewards for ‘good’ behavior.

High inflation rates and the long-run money demand function: Evidence from cointegration tests, Choudhry, T. (1995). High inflation rates and the long-run money demand function: Evidence from cointegration tests. Journal of Macroeconomics17(1), 77-91. This paper attempts to determine whether there exists a stationary long-run money demand function in Argentina, Israel, and Mexico. Tests based on the Johansen method of cointegration reveal strong support for a stationary money demand function in the long run in all three countries. This result only holds when the annualized rate of change of the exchange rate (currency depreciation) is included in the money demand function.

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