See: Assets Under Management.
You were given $100 million to start and, in just a year, you turned it into $172 million. 72% annualized return. Nice work. But then, the next year, you were given a billion dollars more, so that now you had 1.172 billion AUM. You made another $72 million in your Year Two. But that number...kinda sucked.
Why? Because you had sooooo much more in assets under management. Meaning: you had only $100 million to start, and from that relatively small number, you made $72 million. But then, from a number about 6 times as large, you made the same return. Something like 6% return in Year Two.
The key: the total dollar value return doesn't mean all that much in a vacuum. It gets contextualized based on the amount of money you started with to then spit out a total annualized return. That's what this metric focuses on. And it gets really dicey in venture capital and private equity calculations where they don't call all the money upfront in the beginning. Rather, they make maybe a dozen calls for capital over the life of the fund, and the clock then starts ticking a dozen times.
Way complex to figure out the total return rates, annualized. But they do.
Related or Semi-related Video
Finance: What Is a Real Return?67 Views
finance- a la shmoop. what is a real return? like is there a fake return? you
know like the news? well kinda .real return refers to an [man frowns talking to camera]
investment return mapped against inflation. so let's say you invest in a
bond that pays five percent a year for ten years and then pays you back your
principal .boring but nice- you know like a good doctor visit. your nominal return
over that period was 5% but since inflation was 3% a year during that
period on average your real return was only 2% a year- meaning that the
performance of your investment only eked out a 2% net gain against the price of [equation]
milk gas and you know knocked off iPhones. so don't be a chump who thinks
that they're making more money than they really are, and you know keep on keeping
it real. [man sitting in chair, talks to camera]
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