A specific period of time determines the return on investment, whether positive or negative, known as absolute return.
What Is an Absolute Return?
The return on an investment calculated over a predetermined amount of time is called absolute return. It is a measurement of the overall worth of an asset that has increased or decreased and is expressed as a percentage. It evaluates the overall profit or loss that resulted from the investment and can either be positive or negative.
How to Calculate Absolute Return?
The formula of Absolute Return =
What Is Annualized Return?
Unlike absolute return, the annualized return is the annual return the investor will receive from their investment. An annualized return rate can be determined by using the compound annual growth rate. The compounding of returns over the course of time is referred to as the compound annual growth rate (CAGR). It provides potential investors an understanding of the results of an investment, but it doesn’t inform them of how unpredictable the investment is.
Although it is straightforward to calculate an absolute return, it is not easy to translate this figure into terms that are applicable to other types of investments. A clearer picture may be obtained by comparing different types of mutual funds that have traded across a range of different time periods. This is only true if you continually reinvest the money you make from your business.
It is hard to determine which investment is the most profitable due to the varying time frames and rates of return. This problem is solved by using an annualized return that presents the returns using an expression equivalent to one year.