The annualized return is a measure of the performance of an investment. You compute the annualized return using the buy and sell prices and the total time you held the investment. Using the mathematical routine called a power function with a spreadsheet or computer program, you compute the interest rate that if compounded for the holding period gives the final investment value for the initial amount invested. That interest rate is called the annualized rate of return.
Suppose you started with $1,000, and ended with $2,000 after holding the investment for 10 years. For another investment you paid $500 and sold it for $750 in two years. Which investment performed the best? For the above two investments the annualized returns are 7.78 percent and 14.47 percent respectively. Therefore, the $500 investment yielded a larger annualized return than the $1,000 investment.
Because the annualized return standardizes the holding period to one year, you can compare returns for investment with different holding periods. Most investment professionals use annualized returns to evaluate the performance of their investments.You can use the same procedure to compute annualized growth rates for dividends or other measures. For example, to compute the annualized dividend growth rate for two periods, you would use the beginning and ending dividend and the interval between the two dividends to compute the annualized dividend growth rate.
See percent return.