Annualised Return

In short

Return scaled to a 12-month period for comparison across different timeframes

If your investment made 5% in 6 months, the annualised return is about 10.25% (not exactly 10%, because of compounding). It's like translating different languages into English — it converts returns from any time period into a yearly number so you can compare apples to apples.

Annualised return converts a return over any arbitrary period into an equivalent annual figure, assuming compound growth. This standardisation allows fair comparison between investments held for different durations. A 3-month return of 8% annualises differently than a 2-year return of 8%. The calculation uses geometric compounding, not simple multiplication.

Formula

Annualised Return = (1 + Total Return)^(252/Trading Days) - 1

Thresholds

>15%: Above market
7-15%: Market-like
0-7%: Below market
<0%: Negative

Related concepts

Compound Annual Growth Rate (CAGR) — Imagine you planted a tree that grew 50% in 3 years. CAGR tells you it grew about 14.5% each year on average — not 16.7% (50÷3), because growth compounds. It's like saying 'if my investment grew at a steady rate, what would that rate be?'
Total Return — If you bought a stock for £100, it went up to £110, and you also received £5 in dividends, your total return is £15 or 15%. It counts EVERYTHING — not just the price going up, but any cash the investment paid you along the way.
Sharpe Ratio — Sharpe ratio measures how much return you get for every unit of risk you take. A Sharpe of 1.0 means for every 1% of risk, you earn 1% return above the risk-free rate. Higher is better.