More Annualized Returns
Suppose you buy some stock in Johnson & Johnson (JNJ) at a price of $50 per share. Three years later, you sell it for $62.50. No dividends were paid. What is your annualized return on this investment?
The situation here is a bit different because your holding period is now longer than a year, but the calculation is basically the same. For the three year holding period, your return is:
Percentage return = (Pt+1 Pt ) / Pt = ($62.50 $50) / $50 = .25 = 25%
How many three year holding periods are there in a single year? The answer is one third, so m in this case is 1/3. The annualized return is:
1 + EAR = (1 + holding period percentage return)m
= (1 + .25)1/3
= 1.0772
Subtracting the one, we get an annualized return of .0772, or 7.72 percent.