Annualized Return
Annualized return (or annualized ROI) converts a multi-period investment return into an equivalent compound annual growth rate. It allows comparison of investments held for different lengths of time by expressing each as a per-year rate. A 50% return over five years is not equivalent to 50% over one year; annualized return makes the distinction explicit.
Formula
Annualized Return = [(Final Value / Initial Investment)1/n − 1] × 100
where n is the number of years. The expression (Final/Initial)^(1/n) is the compound annual growth rate (CAGR). Fractional years (e.g., 2.5) are supported.
Example
An investment grows from $10,000 to $18,000 over 4 years. Total ROI = 80%. Annualized return = (18,000/10,000)^(1/4) − 1 ≈ 0.158, or 15.8% per year. This means the investment grew at an equivalent compound rate of 15.8% annually.
Why Use Annualized Return?
Simple ROI does not reflect holding period. A 100% return over 2 years implies about 41.4% per year; over 10 years it implies about 7.2% per year. Annualized return standardizes the metric so you can compare a 3-year stock investment with a 7-year real estate hold. See How to Calculate ROI for the full treatment.
Assumptions
The formula assumes reinvestment of returns at the same rate (compound growth). It applies to single initial and final values; it does not account for contributions or withdrawals during the period. For irregular cash flows, IRR is more appropriate.
Relationship to ROI
Annualized return is a refinement of ROI for multi-year investments. Our ROI Calculator computes both: simple ROI (total return) and annualized ROI (per-year equivalent). Use annualized ROI when comparing investments with different holding periods.