Monday, June 30, 2008

Convert absolute return to annual return

I was searching the web for a formula to convert absolute returns to annualised returns but I could not find any. For example if my investment made an absolute return of 30% in 3 years, what will the annualised return be?

You can make use of Excel XIRR function to do the calculation by inputting the cash inflow and outflow with their respective dates. But for the above example, it is a straight forward calculation and it would be faster if you just make use of the calculator.

Let me just show the formula how you can calculate the annualised return. You may contact me if you are interested to know the derivation steps.

Let A be Annual return (A > 0. Put 0.3 for 30% return)
Let B be Absolute return (B > 0. Put 0.3 for 30% return)
Let Y be the number of Years

Absolute return to annual return formula
Therefore if you were to use the formula on the above example, the return will be 0.091 or 9.1% per annum.

The formula may come in handy especially when you do not have an access to a computer. All you need is just a simple scientific calculator. Even if I have an access to a computer, the computation is faster with a calculator than using Excel XIRR for this kind of example.

1 comment:

Anonymous said...

Thanks. It is helpful.