How to calculate annualized returns from monthly returns in Excel

You can watch a video tutorial here.

Calculating the annualized return of an investment is a way of understanding how well the investment is doing. This can be done using the monthly returns of the investment. Excel does not have a function for this calculation but you can create the formula in Excel. 

The formula for calculating the annualized return is:

  1. Annualized return = (1+R)^12-1
    • R is the monthly rate of return

This can be applied if the rate of return is the same for each month. If it is not, then (1+R) is multiplied for each month.

Option 1 – The rate is the same for each month

Step 1 – Create the formula

  • Select the cell in which the result is to appear
  • Type the formula using cell references:
    • =(1+Monthly rate of return)^12-1
  • Press Enter

Step 2 – Format as a percentage

  • Click the Percent Style button on the ribbon

Step 3 – Check the result

  • The annualized return is displayed

Option 2 – The rate is different for each month

Step 1 – Create a temporary column

  • Select the cell next to the return for Jan 2021
  • Type the formula using cell references:

=1+Monthly rate of return

  • Press Enter

Step 2 – Copy the formula

  • Using the fill handle from the first cell, drag the formula to the remaining cells

OR

  1. Select the cell with the formula and press Ctrl+C or choose Copy from the context menu (right-click)
  2. Select the rest of the cells in the column and press Ctrl+V or choose Paste from the context menu (right-click)

Step 3 – Create the formula

  • Select the cell where the result is to appear
  • Type the formula using cell references:
    • = PRODUCT(temporary column)-1
  • Press Enter

Step 4 – Check the result

  • Press the Decrease Decimal button to reduce the number of decimal places
  • The annualized return is displayed