Annualized Rate of Return Calculator
Understanding Annualized Rate of Return
The Annualized Rate of Return (ARR), often referred to as Compound Annual Growth Rate (CAGR), is a powerful metric used to measure the average annual growth of an investment over a specific period longer than one year. It smooths out the volatility of returns, providing a more representative picture of an investment's performance than simple average returns.
Why is it Important?
- Comparison: ARR allows for easy comparison between different investments or investment strategies over varying timeframes.
- Growth Visualization: It shows the consistent annual growth rate an investment would have needed to achieve to reach its final value from its initial value, assuming returns were compounded.
- Long-Term Perspective: It helps investors understand the long-term potential and performance of their holdings.
How to Calculate Annualized Rate of Return
The formula for calculating the Annualized Rate of Return is:
ARR = ((Final Investment Value / Initial Investment Value) ^ (1 / Number of Years)) - 1
Where:
- Initial Investment Value: The starting value of your investment.
- Final Investment Value: The ending value of your investment after the specified period.
- Number of Years: The total duration of the investment period in years.
Example Calculation:
Let's say you invested $10,000 in a mutual fund. After 5 years, the value of your investment has grown to $15,000.
- Initial Investment Value = $10,000
- Final Investment Value = $15,000
- Number of Years = 5
Using the formula:
ARR = (($15,000 / $10,000) ^ (1 / 5)) - 1
ARR = (1.5 ^ 0.2) - 1
ARR = 1.08447 - 1
ARR = 0.08447
To express this as a percentage, multiply by 100:
ARR = 8.45%
This means your investment grew at an average annual rate of approximately 8.45% over the 5-year period.
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function calculateAnnualizedReturn() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var finalInvestment = parseFloat(document.getElementById("finalInvestment").value);
var years = parseFloat(document.getElementById("years").value);
var resultElement = document.getElementById("result");
if (isNaN(initialInvestment) || isNaN(finalInvestment) || isNaN(years) || initialInvestment <= 0 || years <= 0) {
resultElement.textContent = "Please enter valid positive numbers for all fields.";
resultElement.style.color = "red";
return;
}
// Formula: ARR = ((Final Investment Value / Initial Investment Value) ^ (1 / Number of Years)) – 1
var annualizedReturn = Math.pow((finalInvestment / initialInvestment), (1 / years)) – 1;
// Format as percentage with 2 decimal places
var formattedReturn = (annualizedReturn * 100).toFixed(2) + "%";
resultElement.textContent = "Annualized Rate of Return: " + formattedReturn;
resultElement.style.color = "#28a745"; // Green for success
}