The Annualized Return Calculator helps you determine the rate of return (CAGR) on an investment or solve for the future value, initial investment, or time period required to reach a financial goal, assuming consistent compounding.
Annualized Return Calculator
Enter three of the four values below to solve for the missing variable.
Annualized Return Calculator Formula
- F = Future Value
- P = Present Value (Initial Investment)
- R = Annual Rate of Return (as a decimal)
- T = Time in Years
Variables Explained
Understanding the inputs is crucial for accurate calculation of your annual return or future wealth.
- Initial Investment (P): The starting principal amount of your investment portfolio or asset.
- Final Value (F): The total monetary value of the investment after the entire time period.
- Years (T): The total duration, in years, over which the investment is held and compounded.
- Annual Rate (R, %): The annual percentage return or Compound Annual Growth Rate (CAGR) that the investment is expected to yield.
Related Calculators
Explore other financial planning tools for related calculations:
- Net Present Value (NPV) Calculator
- Internal Rate of Return (IRR) Calculator
- Loan Amortization Schedule
- Retirement Savings Projection
What is Annualized Return?
Annualized return, often interchangeable with Compound Annual Growth Rate (CAGR), is the geometric mean rate of return over a specified period longer than one year. It’s the hypothetical rate at which an investment would have grown if it had compounded at a steady rate each year.
Unlike simple arithmetic averages, the annualized return accounts for the compounding effect—meaning the earnings from one year generate their own earnings in the subsequent years. This provides a far more accurate picture of an investment’s performance over time, especially when comparing different assets with varying time horizons.
This metric is essential for investors seeking to measure performance, set realistic financial goals, and benchmark their portfolio against market indices.
How to Calculate Annualized Return (Example)
Suppose you invested $5,000 and, after 7 years, the investment grew to $11,000. Here is how you calculate the annualized return (R):
- Identify Variables: $F = \$11,000$, $P = \$5,000$, $T = 7$ years.
- Use the Formula: The required formula is $R = (F / P)^{1/T} – 1$.
- Calculate the Ratio: $11,000 / 5,000 = 2.2$.
- Find the Root: Calculate the 7th root of 2.2: $2.2^{(1/7)} \approx 1.1187$.
- Subtract One: $1.1187 – 1 = 0.1187$.
- Convert to Percentage: The Annualized Return is $11.87\%$.
Frequently Asked Questions (FAQ)
What is the difference between simple and annualized return? Simple return ignores the compounding effect, providing only a straight line average. Annualized return provides the actual compounded rate of return, making it the preferred metric for long-term investments.
Does this calculator handle contributions? No, this specific calculator assumes a single lump-sum investment. If you have periodic contributions, you would need a more complex time-weighted rate of return (TWRR) or Modified Dietz method calculator.
Can the annual rate be negative? Yes, if your final value (F) is less than your initial investment (P), the calculator will correctly solve for a negative annualized rate of return, indicating a loss.
What is CAGR? CAGR stands for Compound Annual Growth Rate. It is mathematically the same concept as the annualized rate of return used in this calculator, measuring the smooth, geometrically averaged rate over the period.