Annualized Returns

Annualized returns represent the geometric average amount of money earned by an investment each year over a given time period. In the context of volatility, annualizing returns allows traders to compare assets with different time horizons on a standardized basis.

This is crucial for calculating realized volatility, as the variance of daily returns must be scaled up to reflect a full year of trading activity. By normalizing data in this way, financial models can account for the compounding effect of price changes over time.

Annualized returns help investors understand the true performance of their portfolios beyond short-term noise. In crypto, where volatility is extreme, annualizing returns can lead to very large numbers, which necessitates careful interpretation of risk-adjusted performance metrics.

It is the foundation for comparing the efficiency of different volatility-based trading strategies.