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Annualized Return

What is Annualization?

In the two upcoming chapters, we will also discuss the important concept of annualization.

First, let's define what is annualization in terms of return.

It shows how much the investment has grown or shrunk each year, on average, over a period of time.

Additionally, this measure helps us to compare the performance of investments over different time spans by putting them on the same yearly basis.

Сomputing Annualized Returns

Now, we'll discuss in a formal way, how to compute annualized return.

In general, we can compute annualized return using the following expression:

Speaking about the ratio between 1 year and the entire period, we should mention, that it depends on the units in which the period is measured.

For example, if the period is measured in years, than it will be computed in the following way:

Alternatively, we can measure the period in the months, which will give us the following expression:

Coming back to the previous example with stocks of Nvidia and AMD, here is a code, which will help us compute annualized returns for them, using corresponding formulas:


              123456789
            
# Computing annualized return for Nvidia
Nvidia_annualized = (1 + 0.27) ** (12/6) - 1
print('Nvidia:')
print(Nvidia_annualized)

# Computing annualized return for AMD
AMD_annualized = (1 + 3.93) ** (1/5) - 1
print('AMD:')
print(AMD_annualized)

Oppgave

Swipe to start coding

In this task you need to:

Compute the annualized return R_sony_annualized for the Sony Group Corporation stocks, using the given 10-month return R_sony, by defining the required ratio p_sony, and applying the formula for annualized return.
Compute the annualized return R_cola_annualized for the Coca-Cola Company stocks, using the given 5-year return R_cola, by defining the required ratio p_cola, and applying the formula for annualized return.

Løsning

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Seksjon 1. Kapittel 6

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Annualized Return

What is Annualization?

In the two upcoming chapters, we will also discuss the important concept of annualization.

First, let's define what is annualization in terms of return.

It shows how much the investment has grown or shrunk each year, on average, over a period of time.

Additionally, this measure helps us to compare the performance of investments over different time spans by putting them on the same yearly basis.

Сomputing Annualized Returns

Now, we'll discuss in a formal way, how to compute annualized return.

In general, we can compute annualized return using the following expression:

Speaking about the ratio between 1 year and the entire period, we should mention, that it depends on the units in which the period is measured.

For example, if the period is measured in years, than it will be computed in the following way:

Alternatively, we can measure the period in the months, which will give us the following expression:

Coming back to the previous example with stocks of Nvidia and AMD, here is a code, which will help us compute annualized returns for them, using corresponding formulas:


              123456789
            
# Computing annualized return for Nvidia
Nvidia_annualized = (1 + 0.27) ** (12/6) - 1
print('Nvidia:')
print(Nvidia_annualized)

# Computing annualized return for AMD
AMD_annualized = (1 + 3.93) ** (1/5) - 1
print('AMD:')
print(AMD_annualized)

Oppgave

Swipe to start coding

In this task you need to:

Compute the annualized return R_sony_annualized for the Sony Group Corporation stocks, using the given 10-month return R_sony, by defining the required ratio p_sony, and applying the formula for annualized return.
Compute the annualized return R_cola_annualized for the Coca-Cola Company stocks, using the given 5-year return R_cola, by defining the required ratio p_cola, and applying the formula for annualized return.

Løsning

Bytt til skrivebordet for virkelighetspraksisFortsett der du er med et av alternativene nedenfor

Alt var klart?

Takk for tilbakemeldingene dine!

Seksjon 1. Kapittel 6

Bytt til skrivebordet for virkelighetspraksisFortsett der du er med et av alternativene nedenfor