Annualization

How is a return annualized?

The standard method is geometric: find the constant yearly rate that, compounded over the number of years in the period, reproduces the whole-period return.

where: total return is the whole-period gain as a fraction, and years is that period's length in calendar years.

Defaults in Fincanva

• Fincanva annualizes a strategy's return geometrically over the calendar years of the backtest — this is the CAGR figure.
• With Reinvest profits off, the annualised-return slot instead uses the simple arithmetic form, total return ÷ years — the AAGR.
• Volatility is annualized separately, using the standard 252-trading-day convention (×√252), so a per-period dispersion becomes a per-year figure.

Worked example

A strategy gains +10% over 18 months. Because 18 months is 1.5 years, the annualized rate is (1 + 0.10)^(1/1.5) − 1 ≈ 0.066, or about 6.6% per year. Compounding 6.6% a year for a year and a half does produce roughly the same +10%, which is what annualization restates as a comparable yearly number.

An annualized figure describes what a strategy would have done on historical data, not what it will do, and a per-year rate is not a rate you can expect to repeat. Fincanva provides no financial advice — see Is this financial advice?.