Annual Rate of Return Calculator
Understanding the Annual Rate of Return
The Annual Rate of Return (ARR) is a key metric used to measure the profitability of an investment over a specific period, expressed as a percentage. It tells you how much money your investment has made or lost in relation to its initial value, standardized to a one-year period. This allows for easy comparison between different investments, regardless of their holding periods.
To calculate the ARR, you need three primary pieces of information:
- Starting Investment Value: This is the initial amount you invested at the beginning of the period.
- Ending Investment Value: This is the value of your investment at the end of the period.
- Time Period: This is the duration for which you held the investment, measured in years.
The formula for the Annual Rate of Return is as follows:
Total Return = Ending Investment Value – Starting Investment Value
Total Return Percentage = (Total Return / Starting Investment Value) * 100
If the time period is longer than one year, you need to annualize the return. The general formula to calculate the Compound Annual Growth Rate (CAGR), which is a common way to express ARR for multi-year periods, is:
CAGR = [(Ending Value / Starting Value)^(1 / Number of Years)] – 1
This calculator will compute the ARR, considering the time period to provide an annualized figure.
Example:
Let's say you invested $10,000 (Starting Investment Value) in a stock. After 2 years (Time Period), the value of your investment grew to $13,310 (Ending Investment Value).
Using the CAGR formula:
CAGR = [($13,310 / $10,000)^(1 / 2)] – 1
CAGR = [(1.331)^(0.5)] – 1
CAGR = [1.1536] – 1
CAGR = 0.1536
To express this as a percentage, multiply by 100: 15.36%. This means your investment grew at an average annual rate of 15.36% over the two-year period.