How To Calculate Annualized Return From Monthly Returns In Excel

Introduction

Understanding how to calculate annualized return from monthly returns is essential for investors looking to assess their portfolio's performance over time. Excel, while capable, often requires complex functions and formulas for these calculations.

This guide will walk you through the process of converting monthly returns into annualized figures. You'll also discover how Sourcetable's AI-powered platform eliminates the complexity by letting you simply ask for what you want - whether it's analyzing your own data or generating financial calculations - and get instant results. Try Sourcetable now to experience how AI can transform your spreadsheet work.

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.

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Conclusion

Calculating annualized returns from monthly data in Excel requires multiple steps and careful attention to formulas. Even experienced Excel users can find these calculations challenging.

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