1.2.2.2 Annualized Returns
In the examples above, William’s investment had a longer holding period than Sharon’s investment, so to compare these investments more directly, we need to convert them to an equal time period. This involves annualizing the returns, or converting the return to an annual return.
William held his investment for five years, so we must divide his return by five to get the annual return (100% / 5 years = 20% per year). Sharon held her investment for half a year, so we must divide her return by 0.5 to get her annual return (25% / 0.5 years = 50% per year).
By annualizing their returns, we can compare William’s and Sharon’s investments on an apples-to-apples basis. Sharon received