How to Calculate Annualized Returns

The basic idea is to compound the returns to an annual period. So, if we have monthly returns, we know that there are 12 months in the year, similarly there are 52 weeks, 4 quarters, and 365 days. We compound our returns by the number of periods in the whole year.

Let’s take a few examples to understand this.

Example 1: Quarterly Returns

Let’s say we have 5% quarterly returns. Since there are four quarters in a year, the annual returns will be:

Annual returns = (1+0.05)^4 – 1 = 21.55%

Example 2: Monthly Returns

Let’s say we have 2% monthly returns. Since there are 12 months in a year, the annual returns will be:

Annual returns = (1+0.02)^12 – 1 = 26.8%

Example 3: Weekly Returns

Let’s say we have 0.5% weekly returns. Since there are 52 weeks in a year, the annual returns will be:

Annual returns = (1+0.005)^52 – 1 = 29.6%

Example 4: Daily Returns

Let’s say we have 0.1% daily returns. Since there are 365 days in a year, the annual returns will be:

Annual returns = (1+0.001)^365 – 1 = 44.02%

Example 5: 100 Days Returns

We can actually have returns for any number of days and convert them to annualized returns. Let’s say we have 6% returns over 100 days. The annual returns will be:

Annual returns = (1+0.06)^(365/100) – 1 = 23.69%

Annualized returns however have one limitation – they assume that we will be able to reinvest the money at the same rate. However this may not always be possible. If we earned 5% in a quarter there is no guarantee that we will be able to replicate these returns over the next three quarters in the year.