what is annualized total return 
an annualized total return is the geometric average amount of money an investment earns each year over a given period the annualized return formula is calculated as a geometric average to show what an investor would earn over some time if the annual return were compounded an annualized total return provides only a snapshot of an investment s performance and does not give investors any indication of its volatility or price fluctuations investopedia jiaqi zhouunderstanding annualized total returnto understand what annualized total return is it helps to compare the hypothetical performances of two mutual funds below is the annualized rate of return over a five year period for two funds both mutual funds have an annualized rate of return of 5 5 but mutual fund a is much more volatile its standard deviation is 4 2 while mutual fund b s standard deviation is only 1 even when analyzing an investment s annualized return it is important to review risk statistics annualized return formula and calculationthe formula to calculate the annualized rate of return needs only two variables the returns for a given period of time and the time the investment was held the formula is annualized return 1 r1 1 r2 1 r3 1 rn 1n 1 begin aligned text annualized return big 1 r 1 times 1 r 2 times 1 r 3 times dots times 1 r n big frac 1 n 1 end aligned annualized return 1 r1 1 r2 1 r3 1 rn n1 1 for example take the annual rates of returns of mutual fund a above an analyst substitutes each r variable with the appropriate return and n with the number of years the investment was held in this case five years the annualized return of mutual fund a is calculated as annualized return 1 03 1 07 1 05 1 12 1 01 15 1 1 3090 20 1 1 0553 1 0553 or 5 53 begin aligned text annualized return big 1 03 times 1 07 times 1 05 times quad quad 1 12 times 1 01 big frac 1 5 1 1 309 0 20 1 1 0553 1 0553 text or 5 53 end aligned annualized return 1 03 1 07 1 05 1 12 1 01 51 1 1 3090 20 1 1 0553 1 0553 or 5 53 an annualized return does not have to be limited to yearly returns if an investor has a cumulative return for a given period even if it is a specific number of days an annualized performance figure can be calculated however the annual return formula must be slightly adjusted to annualized return 1 cumulative return 365days held 1 begin aligned text annualized return 1 text cumulative return frac 365 text days held 1 end aligned annualized return 1 cumulative return days held365 1 for example assume a mutual fund was held by an investor for 575 days and earned a cumulative return of 23 74 the annualized rate of return would be annualized return 1 2374 365575 1 1 145 1 145 or 14 5 begin aligned text annualized return 1 2374 frac 365 575 1 1 145 1 145 text or 14 5 end aligned annualized return 1 2374 575365 1 1 145 1 145 or 14 5 difference between annualized return and average returncalculations of simple averages only work when numbers are independent of each other the annualized return is used because the amount of investment lost or gained in a given year is interdependent with the amount from the other years under consideration because of compounding for example if a mutual fund manager loses half of her client s money she has to make a 100 return to break even using the more accurate annualized return also gives a clearer picture when comparing mutual funds or the return of stocks that have traded over different periods reporting annualized returnaccording to the global investment performance standards gips a set of standardized industry wide principles that guide the ethics of performance reporting any investment that does not have a track record of at least 365 days cannot ratchet up its performance to be annualized thus if a fund has been operating for only six months and earned 5 it is not allowed to say its annualized performance is approximately 10 since that is predicting future performance instead of stating facts from the past in other words calculating an annualized rate of return must be based on historical numbers 