Annualized returns are calculated by taking the geometric average of the returns over a specified period and then converting it to an annual rate. This allows investors to compare the performance of investments with different holding periods.
Which of the following is NOT a factor in calculating annualized returns?
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Select an option above to see an explanation here.
A) Holding period is a factor in calculating annualized returns. B) Geometric average is a factor in calculating annualized returns. C) Inflation rate is not a factor in calculating annualized returns but a factor in calculating real returns. D) Compounding is a factor in calculating annualized returns.
What is the primary purpose of calculating annualized returns?
A) Adjusting for inflation is not the primary purpose of calculating annualized returns. B) The primary purpose of calculating annualized returns is to compare the performance of investments with different holding periods. C) Calculating the total return on an investment is not the primary purpose of calculating annualized returns. D) Determining the risk level of an investment is not the primary purpose of calculating annualized returns.
Which method of calculating returns takes into account the compounding effect of returns?
A) Arithmetic average does not consider the compounding effect of returns. B) Simple return does not consider the compounding effect of returns. C) Geometric average takes into account the compounding effect of returns. D) Nominal return does not consider the compounding effect of returns.
In the 1980s, a popular investment strategy was to invest in high-yield bonds, also known as "junk bonds." These bonds offered higher returns than traditional bonds but also carried higher risks. Investors who calculated the annualized returns of their junk bond investments were able to compare their performance to other investments, such as stocks and traditional bonds, and make informed decisions about their investment strategies.
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Example Series 65 Example Practice Question
An investor purchases a stock for $100 and sells it one year later for $120. The simple return on this investment is 20% (($120 - $100) / $100). However, if the investor had held the stock for two years and sold it for $144, the annualized return would be 20% as well.
Annualized Return = [(1 + Total Return)^(1/n) - 1] * 100 Where: - Total Return is the overall return on the investment - n is the number of years the investment was held
An investor purchased a stock for $100 and sold it after 3 years for $150. Calculate the annualized return. 1. Calculate the Total Return: ($150 - $100) / $100 = 0.5 or 50% 2. Calculate the Annualized Return: [(1 + 0.5)^(1/3) - 1] * 100 = 14.47% The annualized return is 14.47%.