What is an 'Annualized Rate'
An annualized rate of return is calculated as the equivalent annual return an investor receives over a given period of time. The Global Investment Performance Standards dictate that returns of portfolios or composites for periods of less than one year may not be annualized. This prevents "projected" performance in the remainder of the year from occurring.
BREAKING DOWN 'Annualized Rate'
Annualized returns are returns over a period of time scaled down to a 12month period. This scaling process allows investors to objectively compare the returns of any assets over any periods of time.
Calculation Using Annual Data
Calculating the annualized performance of an investment or index using yearly data utilizes the following data points:
P = principal, or initial investment
G = gains or losses
n = number of years
AP = annualized performance rate
The generalized formula, which is exponential to take into account compound interest over time, is:
AP = ((P + G) / P) ^ (1 / n)  1
For example, assume an investor invested $50,000 into a mutual fund, and four years later, the investment is worth $75,000. This is a $25,000 gain in four years. Thus, the annualized performance is:
AP = (($50,000 + $25,000) / $50,000) ^ (1/4)  1
In this example, the annualized performance is approximately 10.67%.
A $25,000 gain on a $50,000 investment over four years is a 50% return. It is inaccurate to say the annualized return is 12.5%, or 50% divided by four, because this does not take into effect compound interest. If reversing the 10.67% result to compound over four years, the result is exactly what is expected:
$75,000 = $50,000 x (1 + 10.67%) ^ 4
It is very important not to confuse annualized performance with annual performance. The annualized performance is the rate at which an investment grows each year over the period of time to end up at the final valuation. In this example, a 10.67% return each year for four years turns $50,000 into $75,000. But this says nothing about the actual annual returns over the fouryear period. Returns of 4.5%, 13.1%, 18.95% and 6.7% turn $50,000 into approximately $75,000. Also, returns of 15%, 7.5%, 28% and 10.2% provide the same result.
Using Days in the Calculation
Industry standards for most investments dictate the most precise form of annualized return calculation, which uses days instead of years. The formula is exactly the same, except for the exponent:
AP = ((P + G) / P) ^ (365 / n)  1
Assume from the previous example the fund returned $25,000 over a 1,275day period. The annualized return is then:
AP = (($50,000 + $25,000) / $50,000) ^ (365/1275)  1
The annualized performance in this example is 12.31%.

Annualized Total Return
The average amount of money earned by an investment each year ... 
Annual Return
The return an investment provides over a period of time, expressed ... 
Compound Return
The rate of return, usually expressed as a percentage, that represents ... 
Annualize
1. To convert a rate of any length into a rate that reflects ... 
Average Annual Return  AAR
A percentage figure used when reporting the historical return, ... 
Annual Basis
The return earned by an investment over the course of a year. ...

Investing
Calculating Annualized Total Return
The annualized total return is the average return of an investment each year over a given time period. 
Markets
The Effective Annual Interest Rate
The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding. 
Managing Wealth
How To Measure Returns On The Series 65 Exam
An investor who is evaluating the performance of a portfolio manager must take into consideration the impact that any contributions or withdrawals made by the investor will have on the overall ... 
Investing
How To Calculate Your Investment Return
How much are your investments actually returning? Find out why the method of calculation matters. 
Managing Wealth
Learn Simple And Compound Interest
Interest is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as simple interest or compound interest. 
ETFs & Mutual Funds
Explaining Annual Returns
Annual return is the standard percentage rate for most investments and credit facilities. 
Investing
Why You Should Stick with Stocks over the Long Term
Over the long term, it pays to stick with stocks, despite the inevitable bouts of volatility that wrack stock markets from time to time. 
Markets
The Most Accurate Way To Gauge Returns: The Compound Annual Growth Rate
The compound annual growth rate, or CAGR for short, represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios and anything that ... 
Investing
What Is Year Over Year?
Year over year measures performance in one time period versus performance in a previous time period. 
ETFs & Mutual Funds
VV: An ETF Performance Case Study
Discover the seasonal trading patterns of the Vanguard LargeCap ETF, including the three months of the year that have generated the best returns since 2012.

What is the difference between a company's annual return and its annualized return?
Understand the importance of calculating a company's annual return and its annualized return, and learn the differences between ... Read Answer >> 
What annual return could an investor expect on average from the drug sector?
Learn which annual average returns the drugs manufacturing sector and its industries can generate for investors based on ... Read Answer >> 
What is the difference between stated annual return and effective annual return?
Essentially, the effective annual return accounts for intrayear compounding, and the stated annual return does not. The ... Read Answer >> 
What is a good annual return for a mutual fund?
Explore the question of what constitutes a good annual return from investing in mutual funds and the factors that affect ... Read Answer >> 
How do I calculate my portfolio's investment returns and performance?
Learn the basic principles underlying the data and calculations used to perform personal rates of return on investment portfolios. Read Answer >> 
What's the difference between absolute and relative return?
Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >>