Question

Suppose you hold a particular investment for 6 months. You calculate that your holding period return is 5 percent. What is your annualized return?

Answer 1

To annualize a 5 percent holding period return over 6 months, you use the formula for annualizing a return, which gives an annualized return of 10.25 percent.

Step-by-step explanation:

To calculate the annualized return from a holding period return of 5 percent over 6 months, you can use the following formula for annualizing a return:

Annualized Return = (1 + Holding Period Return)^(12 / Number of Months) - 1

Let's substitute the given values into the formula:

Annualized Return = (1 + 0.05)^(12 / 6) - 1

Annualized Return = (1.05)^(2) - 1

Annualized Return = 1.1025 - 1

Annualized Return = 0.1025 or 10.25%

Therefore, the annualized return on the investment, based on the holding period return of 5 percent over 6 months, is 10.25 percent.