Financial Analyst & Certified Public Accountant (CPA) with 15 years of investment modeling experience.
Use this powerful and responsive Annualized Return Calculator (which looks like a calculator on your phone) to quickly determine the Compound Annual Growth Rate (CAGR) of any investment, solving for the rate, time, present value, or future value.
Annualized Return Calculator
Calculated Result:
—Annualized Return Calculator Formula
The Annualized Return is typically calculated using the Compound Annual Growth Rate (CAGR) formula. The base formula solves for the rate (R).
Formula Source: Investopedia: Compound Annual Growth Rate (CAGR), Wikipedia: Compound Annual Growth Rate
Variables Explained
Here is a breakdown of the variables used in the calculator:
- Present Value (PV): The starting amount of the investment or the initial principal.
- Future Value (FV): The final value of the investment after the time period (n).
- Time Period (n): The length of the investment in years.
- Annualized Return (R): The compounded annual rate of return, expressed as a decimal (e.g., 0.1 for 10%).
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What is Annualized Return?
Annualized return represents the geometric average of an investment’s returns over a specified period longer than one year. It smooths out the year-to-year volatility and shows what an investor would have earned, on average, each year, had the returns been compounded at a constant rate.
It is a far more accurate measure of performance than simple average return, especially when dealing with investments over multiple years where compounding effects are significant. Financial professionals often use CAGR as the standard measure to compare the growth of different investment funds or portfolios.
Understanding annualized return is critical for long-term financial planning and benchmarking. If your investment returned 10% in Year 1 and 20% in Year 2, the simple average is 15%, but the true annualized return (CAGR) would be slightly lower due to the compounding effect on the initial investment and the first year’s gains.
How to Calculate Annualized Return (Example)
- Identify Values: Start with an investment (PV) of $50,000 that grows to a final value (FV) of $75,000 over a period (n) of 4 years.
- Divide Future by Present Value: Calculate the total growth factor: $\frac{75,000}{50,000} = 1.5$.
- Apply the Exponent: Raise the growth factor to the power of one divided by the time period: $(1.5)^{\frac{1}{4}} \approx 1.10668$.
- Subtract One: Subtract the initial principal factor (1) from the result: $1.10668 – 1 = 0.10668$.
- Convert to Percentage: The Annualized Return (R) is approximately 10.67%.
Frequently Asked Questions (FAQ)
Is Annualized Return the same as Simple Return?
No. Simple return is the total percentage gain/loss over the entire period. Annualized return distributes that total return evenly across the years, taking compounding into account. It is a geometric, not arithmetic, average.
When should I use the Annualized Return Calculator?
You should use it any time you need to compare two investments that had different durations, or when evaluating the performance of a long-term investment (over one year) against a benchmark index.
What is the difference between CAGR and Annualized Return?
In common usage, CAGR (Compound Annual Growth Rate) and Annualized Return are often used interchangeably, both referring to the geometric average rate of return.
What happens if my investment period (n) is less than one year?
The formula can still be used, but the result will represent the equivalent annual rate assuming the partial-year rate continues for a full year. For periods less than a year, it’s often better to calculate the effective rate for the period and annualize it separately.