calculating return on investment annualized, correct method...

mda99das

Please bear with me as this topic does involve some maths.
There are some investments, that will be guaranteed 58% return on the original investment, over a 20 year period.
Now to me dividing by 20 looks wrong to get the annualized rate to compare. Should I be taking the 20th root of 1.58 ie  1.58^(1/20) =1.023%. This will give the effect of compounding interest. 

Also another question, if you want to work out what time frame it would take for another investment to reach the same ROI you would need to take the log, so log(rate in decimal form)/ log(return) will give you the timeframe? Sorry its been a long long time since I did any maths, but still remember this stuff from my GCSEs.

super_reds

Slight tweak your first part is slightly wrong, should be 1.58^(1/23)-1 then convert to a %age.

2.3% sounds about right but not got excel to hand to check. No compounding would be 46% so feels about right.

super_reds

Second part, definitely logs but do that calculation very rarely, once you get an answer you can always check by doing the same calculation as part one.

eskbanker

mda99das said:

There are some investments, that will be guaranteed 58% return on the original investment, over a 20 year period.

Putting aside the maths question, specifically what investments are you talking about?  Properly regulated investments won't make any guarantees, and 2.3% annual return over 20 years is very likely to be beaten by mainstream investments....