Annualised returns are a measure of the compounded rate of return earned by an investment over a period, scaled down to a one-year period. This metric is crucial for comparing the performance of investments over different time frames. For instance, it allows an investor to compare the performance of a fund over five years with another over three years on a like-for-like basis.
To calculate the annualised return, one must take into account the total return of the investment, the original amount invested and the investment period. The formula involves determining the geometric average of the yearly returns, taking into account the effect of compounding. The result is expressed as a percentage, showing the average annual return over the investment period.
The annualised return offers a clear picture of an investment’s performance but can be misleading if not considered with other factors like volatility, economic conditions and the risk involved. A high annualised return might suggest an attractive investment but may also indicate higher risk. Therefore, it's essential for investors to consider both return and risk when evaluating investment options.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.