Annual rate of return refers to the amount made on an investment over the course of a year. This amount refers to actual return over a year, which is usually determined by subtracting the initial investment amount from the overall return from one year’s time, and dividing that value by the initial investment, though other factors can impact this amount. It is commonly used by someone to determine the return from an investment after one year. Annual rate of return should not be confused with annualized rate of return, which refers to a return amount received in a time period other than one year that is adjusted to reflect the return over 12 months.
Sometimes called yearly rate of return, this is one of the simplest and most straightforward values regarding returns on an investment. It is also a very important value that is often used to determine overall income from returns on investments over the course of a year. When someone determines his or her annual rate of return on an investment, he or she is calculating the rate of actual returns made over the course of a year.
This return rate is typically calculated by someone simply determining the overall return on an investment over the course of 365 days, and then subtracting the original investment amount from that value. Someone who invests $100 US Dollars (USD), for example, and who receives $120 USD back over the course of the year, can determine that he or she had profits of $20 USD for that investment. This value is then divided by the initial investment amount to determine the annual rate of return. In this instance, the $20 USD return from a $100 USD investment would yield a rate of return of 20%.
This should not be confused with an annualized rate of return, which is similar in some respects. An annualized rate is one that is calculated for an investment that returns over a time period other than one year, but which is adjusted to give a yearly value. For example, a rate of return of 20% over the course of two years would equal an annualized rate of just 10%. An annual rate of return is an actual amount based on returns over 12 months, while an annualized rate is adjusted to provide an equivalent yearly rate.