How to Calculate Annualized Return in Excel
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Introduction:
Annualized return is a vital financial measure that helps investors assess the performance of an investment over a specific period. It enables them to compare different investments within the same term. This article will guide you through a step-by-step process on how to calculate annualized return using Microsoft Excel.
Prerequisites:
To follow this tutorial, make sure you have Microsoft Excel installed on your computer.
Step 1: Enter your data
Open a new Excel workbook and input your investment data. Organize it into columns with corresponding time periods in rows. For example:
A | B
———-
Period | Investment_Return
Step 2: Create a new column named “Annualized Return”
In cell C1, type “Annualized Return” as the header for the column. We will later use this column to store our calculations.
Step 3: Calculate the holding period return (HPR)
The holding period return is the total return during the investment time frame. This can be calculated by using the following formula:
HPR = (Ending value / Beginning value) – 1
In cell B2, type “= (Ending value / Beginning value) – 1” replacing ‘Ending value’ and ‘Beginning value’ with actual values of your investment. Then press Enter.
Step 4: Find the number of periods of compound interest
The next step involves determining the number of periods in which compounding occurs. Type it down in another column or row. Generally, if your data deals with monthly data, there are 12 periods, quarterly data has four periods and annual data comprises one period.
Step 5: Calculate annualized return
Use this formula to calculate annualized return:
Annualized Return = ((1 + HPR)^((number of periods) /investment duration))- 1
In cell C2, type “= ((1 + B2)^((Number of periods) / Investment duration)) – 1” replacing ‘Number of periods’ and ‘Investment duration’ with their respective values. Press Enter.
Step 6: Convert the result into percentage
To convert the annualized return value into a percentage, click on cell C2. Locate the “Percentage” button in the “Number” group of the “Home” tab, and click on it. The result will now be displayed as a percentage.
Congratulations! You have successfully calculated annualized return in Excel.
Conclusion:
Calculating annualized return in Excel requires only a few simple steps. By following this guide, you can easily monitor and compare various investments’ performance over time, ensuring better decision-making and financial planning.