What Is Annualized Total Return?

An annualized total return is the geometric average amount of money earned by an investment each year over a given time period. The annualized return formula is calculated as a geometric average to show what an investor would earn over a period of time if the annual return was compounded.

An annualized total return provides only a snapshot of an investment’s performance and does not give investors any indication of its volatility or price fluctuations.

Understanding Annualized Total Return

To understand annualized total return, we’ll compare the hypothetical performances of two mutual funds. Below is the annualized rate of return over a five-year period for the two funds:

• Mutual Fund A Returns: 3%, 7%, 5%, 12%, and 1%
• Mutual Fund B Returns: 4%, 6%, 5%, 6%, and 6.7%

Both mutual funds have an annualized rate of return of 5.5%, but Mutual Fund A is much more volatile. Its standard deviation is 4.2%, while Mutual Fund B’s standard deviation is only 1%. Even when analyzing an investment’s annualized return, it is important to review risk statistics.

Annualized Return Formula and Calculation

The formula to calculate annualized rate of return needs only two variables: the returns for a given period of time and the time the investment was held. The formula is:


$\begin{aligned} \text{Annualized Return} = &\big ( (1 + r_1 ) \times (1 + r_2) \times (1 + r_3) \times \\ &\dots \times (1 + r_n) \big ) ^ \frac{1}{n} – 1 \\ \end{aligned}$Annualized Return=​((1+r1​)×(1+r2​)×(1+r3​)×⋯×(1+rn​))n1​−1​

For example, take the annual rates of returns of Mutual Fund A above. An analyst substitutes each of the “r” variables with the appropriate return, and “n” with the number of years the investment was held. In this case, five years. The annualized return of Mutual Fund A is calculated as:


$\begin{aligned} \text{Annualized Return} &= \big ( (1 + .03) \times (1 + .07) \times (1 + .05) \times \\ &\quad \quad (1 + .12) \times (1 + .01) \big ) ^ \frac{1}{5} -1 \\ &= 1.309 ^ {0.20} – 1 \\ &= 1.0553 – 1 \\ &= .0553, \text{or } 5.53\% \\ \end{aligned}$Annualized Return​=((1+.03)×(1+.07)×(1+.05)×(1+.12)×(1+.01))51​−1=1.3090.20−1=1.0553−1=.0553,or 5.53%​

An annualized return does not have to be limited to yearly returns. If an investor has a cumulative return for a given period, even if it is a specific number of days, an annualized performance figure can be calculated; however, the annual return formula must be slightly adjusted to:


$\begin{aligned} &\text{Annualized Return} = ( 1 + \text{Cumulative Return} ) ^ \frac {365}{ \text{Days Held} } – 1 \\ \end{aligned}$​Annualized Return=(1+Cumulative Return)Days Held365​−1​

For example, assume a mutual fund was held by an investor for 575 days and earned a cumulative return of 23.74%. The annualized rate of return would be:


$\begin{aligned} \text{Annualized Return} &= ( 1 + .2374) ^ \frac{365}{575} – 1 \\ &= 1.145 – 1 \\ &= .145, \text{or } 14.5\% \\ \end{aligned}$Annualized Return​=(1+.2374)575365​−1=1.145−1=.145,or 14.5%​

Difference Between Annualized Return and Average Return

Calculations of simple averages only work when numbers are independent of each other. The annualized return is used because the amount of investment lost or gained in a given year is interdependent with the amount from the other years under consideration because of compounding.

For example, if a mutual fund manager loses half of her client’s money, she has to make a 100% return to break even. Using the more accurate annualized return also gives a clearer picture when comparing various mutual funds or the return of stocks that have traded over different time periods. 

Reporting Annualized Return

According to the Global Investment Performance Standards (GIPS)—a set of standardized, industry-wide principles that guide the ethics of performance reporting—any investment that does not have a track record of at least 365 days cannot “ratchet up” its performance to be annualized.

Thus, if a fund has been operating for only six months and earned 5%, it is not allowed to say its annualized performance is approximately 10% since that is predicting future performance instead of stating facts from the past. In other words, calculating an annualized rate of return must be based on historical numbers.

The Bottom Line

Annualized total return represents the geometric average amount that an investment has earned each year over a specific period. By calculating a geometric average, the annualized total return formula accounts for compounding when depicting the yearly earnings that the investment would generate over the holding period. While the metric provides a useful snapshot of an investment’s performance, it does not reveal volatility and price fluctuations.

What Is an Amalgamation?

An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies.

The term amalgamation has generally fallen out of popular use in the United States, being replaced with the terms merger or consolidation even when a new entity is formed. But it is still commonly used in countries such as India.

Understanding Amalgamations

Amalgamation typically happens between two or more companies engaged in the same line of business or those that share some similarity in operations. Companies may combine to diversify their activities or to expand their range of services.

Since two or more companies are merging together, an amalgamation results in the formation of a larger entity. The transferor company—the weaker company—is absorbed into the stronger transferee company, thus forming an entirely different company. This leads to a stronger and larger customer base, and also means the newly formed entity has more assets.

Amalgamations generally take place between larger and smaller entities, where the larger one takes over smaller firms.

The Pros and Cons of Amalgamations

Amalgamation is a way to acquire cash resources, eliminate competition, save on taxes, or influence the economies of large-scale operations. Amalgamation may also increase shareholder value, reduce risk by diversification, improve managerial effectiveness, and help achieve company growth and financial gain.

On the other hand, if too much competition is cut out, amalgamation may lead to a monopoly, which can be troublesome for consumers and the marketplace. It may also lead to the reduction of the new company’s workforce as some jobs are duplicated and therefore make some employees obsolete. It also increases debt: by merging the two companies together, the new entity assumes the liabilities of both.

Amalgamation Procedure

The terms of amalgamation are finalized by the board of directors of each company. The plan is prepared and submitted for approval. For instance, the High Court and Securities and Exchange Board of India (SEBI) must approve the shareholders of the new company when a plan is submitted.

The new company officially becomes an entity and issues shares to shareholders of the transferor company. The transferor company is liquidated, and all assets and liabilities are taken over by the transferee company.

Example of Amalgamation

In late 2021, it was announced that media companies Time Warner and Discovery, Inc. would combine in a deal worth an estimated $43 billion. Owned by AT&T, Time Warner (which the telecom company acquired in 2018) would be spun off and then amalgamated with Discovery. The new entity, known as Warner Bros. Discovery, Inc., is expected to close at some point in late 2022 and will be headed by Discovery CEO David Zaslav.

Types of Amalgamation

One type of amalgamation—similar to a merger—pools both companies’ assets and liabilities, and the shareholders’ interests together. All assets of the transferor company become that of the transferee company.

The business of the transferor company is carried on after the amalgamation. No adjustments are made to book values. Shareholders of the transferor company holding a minimum of 90% face value of equity shares become shareholders of the transferee company.

The second type of amalgamation is similar to a purchase. One company is acquired by another, and shareholders of the transferor company do not have a proportionate share in the equity of the combined company. If the purchase consideration exceeds the net asset value (NAV), the excess amount is recorded as goodwill. If not, it is recorded as capital reserves.

What Is an Assortment Strategy?

An assortment strategy in retailing involves the number and type of products that stores display for purchase by consumers. Also called a “product assortment strategy,” it is a strategic tool that retailers use to manage and increase sales. The strategy is made up of two major components:

1. The depth of products offered, or how many variations of a particular product a store carries (e.g. how many sizes or flavors of the same product).
2. The width (breadth) of the product variety, or how many different types of products a store carries.

How Assortment Strategies Work

Essentially, a product assortment strategy is a retail industry sales tool with the concepts of depth and breadth at its core. However, not all retailers will be able to use both components of this strategy at the same time.

An assortment strategy can have many layers of sub- and related strategies, as each store will need to tailor the strategy to address its own particular needs and goals.

A deep assortment—the opposite of a narrow assortment—of products means that a retailer carries a number of variations of a single product. A wide variety—the opposite of a narrow variety—of products means that a retailer carries a large number of different kinds of products.

A Challenge for Small Stores

Retailers face a trade-off when determining an assortment strategy. Choosing both a wide variety and a deep assortment of products simultaneously requires a large amount of space, and is typically reserved for big-box retailers.

Stores with smaller spaces may choose to specialize in a certain type of product and offer customers a variety of colors and styles; other stores may offer a deep assortment of products but a narrow variety—one reason why a 7-Eleven (private since 2005) might carry just one brand of canned cat food, for example, while a Kroger (NYSE: KR) likely would have the space to stock 12 brands of canned cat food, if it chose to.

A Brick-and-Mortar Term

Originally, assortment strategy referred only to brick-and-mortar stores because the strategy’s components of depth and breadth had a lot to do with physical space and the visual and tactile interaction between consumer and product. Recently, though, all sales venues—brick-and-mortar, click and mortar, and e-tailing—have used varieties of the strategy to gain competitive advantage.

Adjusting for Demographics

By grouping together items that they believe will appeal to certain types of customers, retailers may fine-tune their assortment strategies to target consumers’ demographic profiles. If a retailer wants to attract customers who are new parents, for example, it might fill the shelves with infant apparel from trendy brands, along with toys, bedding, and other products new parents need.

A Strategic Selling Tool

A strategically arranged product assortment can upsell customers on supplemental items as they search for the item that brought them to the store.

Grouping related items together strategically, whether or not they are necessities, is a common way to stimulate impulse buying:

• By placing garden hoses near sprinklers and other lawn-care products, a retailer might drive more into a customer’s basket. Likewise, installing a luxurious patio dining set—complete with attractive outdoor dishware and bar accessories—in the middle of the more prosaic yard-care products could even send some customers scurrying to the housewares section of the store.
• A presentation of flashlights—or any battery-driven product—could include a nearby display of the batteries needed to use the product. Or a manager could locate the batteries near the check-out counter to remind customers before they leave the store that the flashlight won’t work without batteries.

Potential Disadvantages of Assortment Strategies

Although the depth of product assortment may help attract customers, there are certain caveats to relying only on an assortment strategy. If items in an assortment are placed incorrectly, the demand for these products may vary drastically.

If less-popular items are mixed in with popular items, for example, they could detract from the more-popular items’ appeal. Or, if the assortment is too vast, customers may have difficulty finding the item they are seeking. Overwhelming shoppers with too many buying options can be counterproductive and discourage customer engagement.

What Is an Augmented Product?

An augmented product has been enhanced by its seller with added features or services to distinguish it from the same product offered by its competitors. Augmenting a product involves including intangible benefits or add-ons that go beyond the product itself.

Examples of the features used to create augmented products might include free delivery or in-home installation of a service. Cosmetics companies tend to offer free makeovers and travel-size samples to augment their products.

How an Augmented Product Works

To marketing professionals, every product comes in at least three versions: The core, the actual, and the augmented.

Core Product

The core product is not a physical object. It is the product’s benefit to the consumer. For example, a lipstick will make its buyer attractive; a pair of sneakers will make her healthier; a new phone will help you communicate more efficiently.

Actual Product

The actual product is the item for sale, including the unique branding, design, and packaging that is attached to it. The actual product and its features must deliver on the core-product expectations that consumers want from the product. A car, for example, should function seamlessly with all of its features to deliver the core product and create customer value.

Augmented Product

The augmented product adds on features and services that distinguish it from similar products offered by the competition. The add ons don’t change the actual product and may have a minimal impact on the cost of producing the product. However, an augmented product may have a perceived value that gives the consumer a reason to buy it. The added value may also allow the seller to command a premium price.

Examples of Augmented Products

It’s no secret that companies that can effectively create augmented products create a positive buying experience and have the best chance of developing a loyal base of repeat customers.

Apple TV

Apple Inc. (AAPL) launched its video and TV streaming service in 2019. To boost awareness of the new product and increase sagging iPhone sales, the company created an add-on or augmentation for anyone purchasing a device as stated below from the company’s website.

“Starting today, customers who purchase any iPhone, iPad, Apple TV, iPod touch or Mac can enjoy one year of Apple TV+ for free.”

Discounts and Freebies

A discount coupon for a future purchase is a product augmentation, as is an offer of a refund if the customer is dissatisfied. A free recipe book offered with the purchase of a kitchen appliance such as a crockpot creates an augmented product.

More expensive purchases often come with enhanced augmentation. In-store financing for furniture purchases, a free trial, or free delivery all augment the product being offered. A cable company competing for new business might offer a more convenient home installation schedule to attract customers.

Service Sells

Good customer service and store ambiance are augmentations that brick-and-mortar retailers add to their entire range of products. A generous return policy and in-store demonstrations are others. A retail store that sells cooking supplies might offer free cooking classes with each purchase. Apple, for example, offers teaching and guidance for how to use their products through their retail locations. An engaging website to help customers learn about a product or service, as well as an online support team, are product augmentations.

In considering almost any purchase, consumers have a wealth of options. An augmented product has been made to stand out from other products, or the same product offered by other sellers.