Annualising

Restating a return earned over one period as the equivalent rate per year, by compounding rather than multiplying, so returns over different horizons can be compared. It magnifies noise as much as return.

Where you will meet it

Annualising appears in 8 learning outcomes on the CFA syllabus. A few of them:

• Work out an equity's price return and its total return
  CFA Level I · Equity Investments

  “Over several periods the returns are linked by compounding, multiplying (1 + r) for each period and subtracting one, not by adding them, and an annualised figure is the geometric mean of those period returns.”

• Restate a yield at a different compounding frequency
  CFA Level I · Fixed Income

  “To restate a yield from one periodicity to another, convert to a per-period rate, compound it to the new period length, and annualise.”

• Work out an annualised return and explain what it means
  CFA Level I · Quantitative Methods

  “Annualising restates a return earned over one period as the equivalent rate per year, so that returns over different horizons can be compared.”

• Set out where firms can raise short-term funds
  CFA Level I · Corporate Issuers

  “Trade credit from suppliers is the most common and looks free until the discount forgone is annualised.”

See also

Compounding

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

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