Annualization converts a return earned over a whole period into an equivalent per-year rate, so results measured over different lengths of time can be compared on one yearly scale. A +30% gain means very different things over one year versus over ten; annualizing restates each as "per year" so the two are directly comparable. 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.
Also seen as: annualisation
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.
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.