Calculate Annualized Rate of Return in Excel

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Annualized Rate of Return Calculator

Understanding the Annualized Rate of Return

The Annualized Rate of Return (ARR), often referred to as the Compound Annual Growth Rate (CAGR), is a crucial metric for evaluating the performance of an investment over multiple periods. It represents the average annual growth rate of an investment, assuming that profits are reinvested at the end of each year. This smooths out volatility and provides a more stable understanding of how an investment has performed compared to simply looking at the total return over the entire period.

Why is ARR important? It allows for a standardized comparison between different investments with varying timeframes and complexities. For instance, if one investment grew from $10,000 to $20,000 in 3 years and another grew from $5,000 to $9,000 in 5 years, ARR helps you determine which investment was more efficient on an annual basis.

How to Calculate Annualized Rate of Return

The formula for calculating the Annualized Rate of Return is:

ARR = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] – 1

Where:

  • Ending Value: The total value of the investment at the end of the period.
  • Beginning Value: The initial amount invested.
  • Number of Years: The total duration of the investment in years.

This formula essentially finds the constant rate of growth that would take an investment from its beginning value to its ending value over the specified number of years.

Example Calculation

Let's say you invested $10,000 (Initial Investment Value) in a stock. After 5 years (Number of Years), the value of your investment has grown to $15,000 (Final Investment Value).

Using our calculator:

  • Initial Investment Value: $10,000
  • Final Investment Value: $15,000
  • Number of Years: 5

The calculation would be:

ARR = [($15,000 / $10,000) ^ (1 / 5)] – 1

ARR = [(1.5) ^ (0.2)] – 1

ARR = [1.08447] – 1

ARR = 0.08447 or 8.45%

This means your investment grew at an average rate of 8.45% per year over the 5-year period.

The Annualized Rate of Return is a powerful tool for understanding investment performance and making informed financial decisions.

function calculateAnnualizedReturn() { var initialInvestment = parseFloat(document.getElementById("initialInvestment").value); var finalInvestment = parseFloat(document.getElementById("finalInvestment").value); var numberOfYears = parseFloat(document.getElementById("numberOfYears").value); var resultDiv = document.getElementById("result"); if (isNaN(initialInvestment) || initialInvestment <= 0) { resultDiv.innerHTML = "Please enter a valid positive number for the Initial Investment Value."; return; } if (isNaN(finalInvestment) || finalInvestment <= 0) { resultDiv.innerHTML = "Please enter a valid positive number for the Final Investment Value."; return; } if (isNaN(numberOfYears) || numberOfYears <= 0) { resultDiv.innerHTML = "Please enter a valid positive number for the Number of Years."; return; } var arr = Math.pow((finalInvestment / initialInvestment), (1 / numberOfYears)) – 1; var formattedArr = (arr * 100).toFixed(2); resultDiv.innerHTML = "

Annualized Rate of Return:

" + formattedArr + "%"; }

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