Annualised Returns

Question 1

Annualised Returns

Answer 1

An = [(A/P)1/n -1] x 100
Annualised returns involve taking a return period which isn’t in years (for example, the return from 3-month treasury bills) and turning their returns into annualised figures.
Remember, 1 is the unit and this represents the year: 1/n
In this case, n = the number of periods ‘compared to a year’ and can be either more (say 5 years where n = 5, or less, say 6 months where n = 0.5) .

Question 2

Compounded Annual Return (CAR)

Answer 2

[Year 1 x Year 2 x Year 3 – 1] = total return over a 3-year period
The annualised return is a simplified annual rate – useful for comparison but, doesn’t show the true picture each year.

Question 3

Capital Return

Answer 3

[(Finish/start) - 1] x 100%
This is a simplified ‘holding period return’.

Question 4

Real v Inflation

Answer 4

Rreal = Rnominal - Rinflation