How Do You Calculate Annualized Returns?
Annualized returns look at an investment and how much your return on the investment would be over the course of a year. When you have a short-term capital gain or loss, the return is only rated over the course of less than a year. However, you can use the annualized return formula in order to calculate how this return would be over a year, but to make this calculation you need to know your current rate of return.
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Instructions
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Add one to your current rate of return, which represents the interest rate plus the principal. For example, if you have an investment with a 7 percent rate of return, so 1 plus 0.07 equals 1.07.
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Divide the number of days you had the investment by 365. This is the percent of days owned. In the example, assume you had the investment for 70 days, so 70 days divided by 365 days equals 0.191780822.
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Divide one by the percent of days owned. In the example, 1/0.191780822=5.214285714.
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Raise the interest rate plus one to the power one divided by the percent of days owned. This is your return factor. In the example, 1.07 raised to the 5.214285714th power equals 1.423034444.
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Subtract one from the return factor. In the example, 1.423034444 minus one equals 0.423034444 or about 42 percent.
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References
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