Welcome to the **Best CAS Calculator** for financial metrics. Use this Annualized Return Calculator to quickly find the Compound Annual Growth Rate (CAGR) of an investment, or solve for the Start Value, End Value, or Duration, given the other three variables.
Annualized Return Calculator
Calculation Details
Annualized Return (CAGR) Formula
CAGR = ((End Value / Start Value)^(1 / Years)) - 1
or
F = P * (1 + R)^T
Formula Sources: Investopedia: CAGR, The Balance: How to Calculate CAGR.
Variables Explained
- Start Value (P): The initial amount of the investment or the metric’s starting figure.
- End Value (F): The final value of the investment after the full duration.
- Years (T): The total duration of the investment period in years.
- Annualized Return Rate (R): The calculated annual growth rate, assuming compounding.
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What is Annualized Return?
The Annualized Return, commonly known as the Compound Annual Growth Rate (CAGR), represents the average annual growth rate of an investment over a specified period longer than one year. It’s a hypothetical rate because it assumes the investment grew at a steady rate over the period, smoothing out the volatility of market movements.
CAGR is considered one of the most accurate ways to calculate and compare returns across different investments. While the arithmetic mean return averages annual percentage changes, the CAGR links the initial investment value to the final investment value, providing the geometric mean of returns. This makes it a better reflection of the true growth of an asset.
How to Calculate Annualized Return (Example)
Let’s find the CAGR for an investment that grew from $10,000 to $15,000 over 5 years:
- Divide the End Value by the Start Value: $15,000 / $10,000 = 1.5$
- Raise the result to the power of one divided by the number of years (1/T): $1.5^{(1/5)} = 1.5^{0.2} \approx 1.08447$
- Subtract 1 from the result: $1.08447 – 1 = 0.08447$
- Convert the final number to a percentage: $0.08447 \times 100 \approx 8.45\%$
- The Compound Annual Growth Rate (CAGR) for the investment is 8.45%.
Frequently Asked Questions (FAQ)
1. Why is Annualized Return (CAGR) better than simple average return?
CAGR is a geometric mean that accounts for compounding, providing a truer picture of an investment’s growth by linking the initial and final values. Simple average return does not account for compounding.
2. What happens if the End Value is less than the Start Value?
If the End Value is lower, the calculator will return a negative Annualized Return, which indicates a loss over the investment period.
3. Can I use this calculator to solve for the number of years?
Yes. If you input the Start Value, End Value, and the expected Rate, the calculator will solve for the number of Years (T) required to reach the End Value.
4. Is the Annualized Return the same as the IRR?
No. CAGR assumes a single initial investment and a single final value. The Internal Rate of Return (IRR) is used for cash flow streams (multiple deposits/withdrawals) and is a more complex measure.