what is an annual return 
an annual return is the return that an investment provides over time it s 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 it represents a geometric mean rather than a simple arithmetic mean understanding annual returnan annual return can be calculated for various assets which include stocks bonds funds commodities and some types of derivatives it s the de facto method for comparing the performance of investments with liquidity this process is a preferred method considered to be more accurate than a simple return because it includes adjustments for compounding interest different asset classes tend to have different strata of annual returns 1annual returns on stocksalso known as an annualized return the annual return expresses a stock s increase in value over a designated period information regarding the current price of the stock and the price at which it was purchased is required to calculate it the purchase price must be adjusted accordingly if any splits have occurred the simple return percentage is calculated first when the prices are determined with that figure ultimately being annualized 2the simple return is the current price minus the purchase price divided by the purchase price example of the annual return calculationcagr ending value beginning value 1 years 1 where cagr compound annual growth rate years holding period in years begin aligned text cagr left left frac text ending value text beginning value right frac 1 text years right 1 textbf where text cagr text compound annual growth rate text years text holding period in years end aligned cagr beginning value ending value years1 1where cagr compound annual growth rateyears holding period in years consider an investor who purchases a stock for 20 on jan 1 2024 the investor then sells the stock on jan 1 2029 for 35 and realizes a 15 profit the investor also receives a total of 2 in dividends over the five year holding period 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 37 20 1 5 1 13 1 annual return begin aligned left left frac 37 20 right frac 1 5 right 1 13 1 text annual return end aligned 2037 51 1 13 1 annual return the annualized return varies from the typical average and shows the real gain or loss on an investment as well as the difficulty in recouping losses losing 50 on an initial investment requires a 100 gain the next year to make up the difference annualized returns help even out investment results for better comparison because of the sizable difference in gains and losses that can occur annual return statistics are commonly quoted in promotional materials for mutual funds etfs and other individual securities annual returns on a 401 k the calculation differs when you re determining the annual return of a 401 k during a specific year the total return must first be calculated the starting value for the time period being examined is needed along with the final value any contributions to the account during the period in question must be subtracted from the final value before performing the calculations the adjusted final value is divided by the starting balance after the adjusted final value is determined subtract 1 from the result and multiply that amount by 100 to determine the percentage of total return 