Annual Return

AAA

DEFINITION of 'Annual Return'

The return an investment provides over a period of time, expressed as a time-weighted annual percentage. Sources of returns can include dividends, returns of capital and capital appreciation. The rate of annual return is measured against the initial amount of the investment and represents a geometric mean rather than a simple arithmetic mean.

Annual return is the de facto method for comparing the performance of investments with liquidity, which includes stocks, bonds, funds, commodities and some types of derivatives. Different asset classes are considered to have different strata of annual returns.

INVESTOPEDIA EXPLAINS 'Annual Return'

For example, consider an investor that purchases a stock on January 1, 2000, for $20. The investor then sells it on January 1, 2005, for $35 – a $15 profit. The investor also received a total of $2 in dividends over the five-year holding period. In this example, the investor's total return over five years would be $17, or (17/20) 85% of the initial investment. The annual return required to achieve 85% over five years follows the formula for the compound annual growth rate (CAGR):

CAGRFormula1.gif



(37/20) ^(1/5 (yr)) – 1 = 13.1% annual return

Annual-return statistics are commonly quoted in promotional materials for mutual funds, ETFs and other individual securities.

RELATED TERMS
  1. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  2. Average Return

    The simple mathematical average of a series of returns generated ...
  3. Average Annual Return - AAR

    A percentage figure used when reporting the historical return, ...
  4. Exchange-Traded Fund - ETF

    A security that tracks an index, a commodity or a basket of assets ...
  5. Growth Rates

    The amount of increase that a specific variable has gained within ...
  6. Performance Audit

    An audit performed on an asset manager by an outside accounting ...
Related Articles
  1. What is the difference between stated ...
    Investing

    What is the difference between stated ...

  2. How To Calculate Your Investment Return
    Fundamental Analysis

    How To Calculate Your Investment Return

  3. Benchmark Your Returns With Indexes
    Mutual Funds & ETFs

    Benchmark Your Returns With Indexes

  4. 3 ETF Signals You May Use For Confirmation
    Economics

    3 ETF Signals You May Use For Confirmation

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center