Annualization

Also seen as: annualisation

This page covers the operation and the conventions Fincanva applies to it, including how volatility is annualized; the annualized return figure it produces for a strategy is CAGR, or AAGR when profits are not reinvested.

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.

$$\key{1}{\text{annualized rate}} = (1 + \key{2}{\text{total return}})^{1/\key{3}{\text{years}}} - 1$$

• the equivalent per-year rate
• the whole-period gain, as a fraction
• the period's length in calendar years

Total return is the whole-period figure being restated per year.

How does Fincanva handle it?

• 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.

What does it look like in practice?

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.

A per-year rate is not a rate you can expect to repeat.