What is the Annualized Rate?

The annualized rate is the computed amount of return that would be realized if a short-term investment were to be extrapolated for a period of one year. Using annualized rates to compare investments having different durations can cause incorrect investment decisions, since doing so assumes that short-term investments can be continually rolled over into similar investments that generate similar returns, which is not necessarily the case.

Example of Annualized Rate

Mr. Jones has held an investment for the past four months, and has generated a 3% return from it during that time. The annualized rate of return on this investment would be 9%, assuming that it can continue to generate that same return for a more extended period of time. However, a variety of factors might impact this extended rate of return, such as the seasonality of profit generation. In reality, Mr. Jones might find that this investment has a negative return through the remainder of the year.