A professional financial analyst ensuring the formula and calculation logic are accurate.
Welcome to the **Annualized Return Calculator**. This tool helps you quickly determine the compound annual growth rate (CAGR) of an investment over a specific period, providing a clear measure of your investment performance.
Annualized Return Calculator
Annualized Return (CAGR)
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Detailed Steps
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Annualized Return Formula (CAGR)
The Compound Annual Growth Rate (CAGR) formula is:
CAGR = ((End Value / Start Value)^(1 / Years)) - 1
Formula Source: Investopedia – CAGR
Variables Explained
- Start Value ($): The initial market value of the investment at the beginning of the period.
- End Value ($): The final market value of the investment at the end of the period.
- Number of Years: The duration of the investment, in years. This can be fractional (e.g., 1.5 years).
Related Calculators
What is Annualized Return?
Annualized Return, often referred to as Compound Annual Growth Rate (CAGR), represents the mean annual growth rate of an investment over a specified period longer than one year. It’s crucial for comparing investment performance because it smooths out returns, neutralizing the volatile effects of compounding.
Unlike simple return, which measures the total growth from point A to point B, CAGR assumes that the profits were reinvested each year over the term of the investment. This metric is a much more accurate reflection of an investment’s compounding performance and is widely used by analysts and investors.
A high CAGR suggests the investment has delivered strong, consistent growth, making it a key indicator for long-term financial planning and strategy evaluation.
How to Calculate Annualized Return (Example)
Suppose you invested $5,000 and it grew to $10,000 over 7 years.
- Find the Ratio: Divide the End Value by the Start Value. $10,000 / $5,000 = 2$.
- Raise to the Power: Calculate the reciprocal of the number of years. $1 / 7 \approx 0.142857$.
- Apply the Formula: Raise the ratio from step 1 to the power from step 2. $2^{0.142857} \approx 1.104089$.
- Subtract 1: Subtract 1 from the result to find the rate. $1.104089 – 1 = 0.104089$.
- Final Result: Convert to percentage: $10.41\%$. The annualized return is 10.41\%.
Frequently Asked Questions (FAQ)
What is the difference between Annualized Return and Simple Return?
Simple return calculates the total growth without accounting for the time value of money or compounding. Annualized return (CAGR) provides a smooth, yearly rate of return, assuming reinvestment, which is generally a more realistic measure of investment performance.
Does the Annualized Return account for inflation?
No, the standard Annualized Return is a nominal return. To calculate the real (inflation-adjusted) return, you would first need to adjust your end value (or rate) for inflation before applying the CAGR formula.
Can the Annualized Return be negative?
Yes. If the End Value is less than the Start Value, the resulting CAGR will be a negative percentage, indicating a loss over the investment period.
What inputs are required for the Annualized Return Calculator?
You must provide the Start Value (initial investment), the End Value (final portfolio value), and the exact number of Years the investment was held.