# Cumulative & Annualized Returns

The cumulative return of an investment is the aggregate return that an investment has gained or lost over time (it can be both positive or negative). If you have Open-High-Low-Close stock data, you can compute cumulative returns on its adjusted price as dividends, and stock splits will lead to incorrect results.

\[R_c = \frac{P_c}{P_i} - 1\]

where \(R_c\) is the cumulative return, \(P_c\) is the current price, and \(P_i\) is the initial price. If a stock’s price was 20 dollars on January 1st, 2015, and 67 dollars on January 1st, 2018, then the cumulative return is 235%.

```
cumulative_return <- function(latest_price, first_price) {
ret <- (latest_price / first_price) - 1
return(ret)
}
cumulative_return(67, 20) * 100
```

`## [1] 235`

Annualized returns are useful when you want to compare the performances of securities that have been on the market for different amounts of time. Unless a stock has traded less than a year, you can compute the annualized return as

\[R_a = (1 + R_c) ^ \frac{1}{n} - 1\]

where \(n\) is the number of years over which the cumulative return took place. With our previous example, it turns out that the annual rate of return for our security is 11%.

```
annualized_returns <- function(cumulative, years) {
ret <- ((1 + cumulative)**1/years) - 1
return(ret)
}
annualized_returns(2.35, 3) * 100
```

`## [1] 11.66667`

You can read more about this on The Motley Fool.