Calculate Annualized Return from Monthly Returns in Excel

To calculate the annualized rate of return from monthly returns in Excel, you can use various methods, each suitable for different scenarios. The annualized return is a key measure for comparing investment performance.

Future Value Schedule Method

Utilize the FVSCHEDULE function for a straightforward calculation of annualized returns. This function compounds the monthly returns to project the final investment value. The formula structure is =FVSCHEDULE(1, range_of_returns)^(12/n)-1, where n is the number of months.

Product of Monthly Returns

Another option is the product method, which involves multiplying one plus each month's return, successively. The formula structure is =(PRODUCT(1+range_of_monthly_returns)^(12/n_months))-1. This method directly calculates the compounded return over a year.

Large Table Method

The large table method, though less efficient, is beneficial for rolling returns. Construct a table with accumulated returns and derive the annualized returns using a formula similar to the product method. This approach is useful for a visual representation of returns over time.

Array Method

For a more advanced Excel user, the array method can be employed. This involves using an array formula to calculate the compound return. The formula is entered with CTRL+SHIFT+ENTER and computes the annualized return from a series of monthly returns.

Choose the method that best fits your data's nature and your proficiency with Excel functions. For regular intervals and single-period cash flows, the IRR or XIRR functions are not suitable. The ARR or CAGR can be calculated using the geometric average of the periodic returns.

Common Use Cases

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  Calculating the annualized performance of a personal investment portfolio
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  Comparing the annualized returns of different mutual funds for investment analysis
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  Assessing the long-term profitability of a trading strategy
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  Evaluating the performance of a financial advisor or asset manager
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  Projecting future investment growth for retirement planning

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