how do you calculate annualised return?

  • Thread starter Thread starter YC
  • Start date Start date
Y

YC

Hi - Anyone out there have the way to calculate the annualised return for an
investment? Many thanks for your assistance
 
Fri said:
We need a lot more information to be able to answer that question.
But maybe you can answer it yourself by reading this:

http://office.microsoft.com/en-us/excel/HA011117451033.aspx
Click to expand...

Bloody Microsoft.

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Yes. The most common method, although there are others, is to use the XIRR
function. Post back if you need more help with it.

Regards,
Fred.
 
YC said:
Hi - Anyone out there have the way to calculate the
annualised return for an investment?
Click to expand...

That depends on exactly what you mean.

If you have a series of activity (monetary amounts of investments and
returns) on irregular dates, then yes, XIRR is one way to compute an annual
return rate. Be sure to assign opposite signs to the different types of
amounts -- typically, negative numbers for investments and positive numbers
for returns.

But if you mean that you have a periodic return rate (e.g. the return rate
for a quarter), and you want to annualize it, XIRR is overkill and somewhat
contorted to use. The "most common" Excel function to use would be FV,
although many people simply use an exponential expression.

In general, if the periodic rate is "r" and there are "n" periods in a year,
the annualized rate can be computed with either of the following equivalent
formulas (formatting the cell as Percentage):

=fv(r, n, 0, -1) - 1

=(1+r)^n - 1

By the way, if you compare those results with XIRR, you will usually see
some difference. This is because XIRR uses 365/(D2-D1) for "n", where D1 and
D2 are the starting and ending dates of the period. You could do the same in
the formulas above; but that is not how periodic rates are "commonly"
annualized.

Caveat: Some financial engineers use the number of trading days between
starting and ending dates of the period, not the number of calendar days. On
average, there are 252 trading days per year.
 
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