Understanding Absolute Return
Absolute return refers to the calculation of the overall gain or loss of an investment within a specified period.
It is expressed as a percentage and reflects the total increase or decrease in the value of an asset.
The result can be either positive or negative, indicating the overall profit or loss generated by the investment.
Understanding Annualized Return
Unlike absolute return, annualized return represents the yearly return an investor can expect from their investment.
It is determined using the compound annual growth rate (CAGR), which considers the compounding of returns over time.
While annualized return provides insight into investment performance, it does not indicate the investment’s level of volatility.
Comparing different investments with varying periods and rates of return can be challenging when evaluating profitability.
By using annualized return, expressed as an equivalent annual figure, investors can make more meaningful comparisons between different types of investments.