A certified financial analyst ensuring the accuracy and reliability of this calculator’s underlying methodology.
Use the Annualized Return Calculator to accurately determine the average geometric rate of return on an investment over a multi-year period. This is essential for comparing investments with different holding periods.
Annualized Return (Evolve) Calculator
Annualized Return Rate
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Calculation Steps
Annualized Return Formula
$$ \text{ARR} = \left( \left(\frac{\text{Ending Value}}{\text{Starting Value}}\right)^{1/n} – 1 \right) \times 100 $$
Where $n$ is the Investment Period in years.
Variables Explained
- Starting Value ($): The initial principal or capital invested at the beginning of the period.
- Ending Value ($): The total value of the investment at the end of the period, including all gains, losses, and reinvested dividends.
- Investment Period (Years): The total number of years the investment was held. This can be fractional (e.g., 1.5 years).
Related Calculators
Explore other financial tools to better understand your investment performance:
- Future Value with Annuity Calculator
- Compound Annual Growth Rate (CAGR) Calculator
- Inflation-Adjusted Return Calculator
- Time-Weighted Return Calculator
What is Annualized Return?
Annualized Return (ARR) is the geometric average amount of money earned on an investment over a year. It standardizes the return into a single annual figure, making it the most effective way to compare investments of different durations. Unlike simple average return, ARR accounts for the compounding effect of the investment.
This metric is crucial because it provides an ‘apples-to-apples’ comparison. For instance, comparing a 5-year investment that returned 40% with a 2-year investment that returned 15% is misleading. By annualizing the returns, you find the equivalent constant annual growth rate, allowing for a fair evaluation of managerial or investment performance.
How to Calculate Annualized Return (Example)
Suppose you invested $50,000 for 7 years, and the investment grew to $85,000.
- Find the Total Return Ratio: Divide the Ending Value ($85,000) by the Starting Value ($50,000), which equals 1.7.
- Determine the Exponent: Calculate the inverse of the number of years ($n$): $1/7 \approx 0.142857$.
- Apply the Power: Raise the Total Return Ratio to the power of the exponent: $1.7^{0.142857} \approx 1.0792$.
- Subtract and Convert: Subtract 1 from the result, and multiply by 100 to get the percentage: $(1.0792 – 1) \times 100 = 7.92\%$.
The Annualized Return is 7.92%.
Frequently Asked Questions (FAQ)
- Is Annualized Return the same as CAGR?
- Yes, for single investments without intermediate deposits or withdrawals, the Annualized Return is mathematically identical to the Compound Annual Growth Rate (CAGR). They are both geometric averages used to smooth out returns over multiple periods.
- Why is the geometric average used instead of the arithmetic average?
- The geometric average (ARR) is used because it reflects the effect of compounding. Arithmetic average only works for simple returns and doesn’t accurately represent the annual growth rate needed to get from the starting value to the ending value.
- Can the Annualized Return be negative?
- Yes, if the Ending Value is lower than the Starting Value, the calculator will return a negative Annualized Return, indicating an average annual loss over the period.
- Does this calculation include taxes or fees?
- The calculator uses the values you provide. If your Starting Value is post-fee/tax or your Ending Value is before fees/taxes, the result will reflect the pre-tax/pre-fee return. For a true net return, always use after-tax, after-fee values.