Annualized Rate of Return
Annualized rate of return, abbreviated as AROR, is a measure used to calculate the average rate of return per year on an investment over a specific period, typically expressed as a percentage. It helps investors understand the performance of an investment on an annualized basis, regardless of the investment's duration or the frequency of returns.
Once calculated, the annualized rate of return represents the average rate of return per year that the investment has generated over the holding period. For example, if an initial investment of 10,000 grows to 15,000 over a 3 year period, the total return would be $5,000. Using the formula above, the annualized rate of return would be computed based on this total return and holding period.
The annualized rate of return is valuable for comparing the performance of different investments, assessing investment strategies, and making informed investment decisions. It provides a standardized measure that allows investors to evaluate investment opportunities and track the growth of their investment portfolios over time.
annualized rate of return Formula |
$ AROR = \left[ IV + GL \;/\; IV \right]^{ \left( 1 \;/\; HP \right) -1 } $ |
Symbol |
$ AROR $ = annualized rate of return |
$ IV $ = initial value |
$ GL $ = gains or losses |
$ HP $ = holding period |