The annualized total return is a measure that expresses the compound annual rate of return an investment generates over a specific period, considering both capital appreciation (or depreciation) and income from dividends or interest. It provides a way to evaluate the overall performance of an investment, factoring in the effects of compounding.

The formula for calculating the annualized total return is as follows:

\text{Annualized Total Return} = \left( \frac{\text{Ending Value} + \text{Income}}{\text{Beginning Value}} \right)^{\frac{1}{\text{Number of Years}}} – 1

Here’s a breakdown of the components:

– \(\text{Ending Value}\) is the value of the investment at the end of the period.
– \(\text{Income}\) represents any income generated by the investment, such as dividends or interest, during the period.
– \(\text{Beginning Value}\) is the initial value of the investment at the beginning of the period.
– \(\text{Number of Years}\) is the total number of years the investment was held.

This formula takes into account both the capital appreciation of the investment and any income it generated over the investment horizon.

For example, suppose you invested $10,000 in a stock, and after five years, the investment grew to $12,000, and you received $500 in dividends over that period. The annualized total return would be calculated as follows:

\text{Annualized Total Return} = \left( \frac{12,000 + 500}{10,000} \right)^{\frac{1}{5}} – 1

Once you calculate this, it gives you the compound annual rate of return for the investment over the five-year period.

Keep in mind that this measure assumes that the income is reinvested to take advantage of compounding. Additionally, it’s a useful metric for evaluating the overall performance of an investment, considering both capital gains and income.