Dpr Calculator 5e

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Content reviewed and fact-checked by: David Chen, CFA. Last Updated: December 2025.

The Annualized Return Calculator determines the constant rate of return that an investment earned per year over a specified period. This is essential for comparing different investment opportunities objectively.

Annualized Return Calculator

Your Annualized Return is:

Annualized Return Formula

$$ \text{Annualized Return} = \left[ \left( \frac{\text{Final Value}}{\text{Initial Investment}} \right)^{\frac{1}{\text{Years}}} \right] – 1 $$ Formula Source: Investopedia

Variables Explained

  • Initial Investment Value: The amount of money originally invested.
  • Final Investment Value: The total value of the investment at the end of the period, including all gains (or losses) and reinvested dividends/interest.
  • Investment Period (Years): The total duration (in years) the investment was held.

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What is Annualized Return?

Annualized Return represents the geometric average amount of money earned on an investment each year over a given time period. It smooths out year-to-year fluctuations to provide a single, consistent rate, allowing for direct comparison across investments with different durations. Unlike simple return, it accounts for the compounding effect.

The primary purpose of annualizing a return is to standardize performance measurement. For instance, comparing a five-year return of 50% to a two-year return of 20% is meaningless without annualizing them. The Annualized Return provides the equivalent constant yearly growth rate that would yield the observed total growth.

How to Calculate Annualized Return (Example)

  1. Determine Investment Ratio: An investment starts at \$10,000 and ends at \$15,000 over 5 years. Calculate the ratio: $15,000 / 10,000 = 1.5$.
  2. Calculate the Time Exponent: The exponent is 1 divided by the number of years: $1 / 5 = 0.2$.
  3. Raise the Ratio to the Exponent: $1.5^{0.2} \approx 1.08447$. This represents the total growth factor per year.
  4. Subtract One to Find the Rate: Subtract 1 from the factor to get the Annualized Return rate: $1.08447 – 1 = 0.08447$.
  5. Final Result: The Annualized Return is 8.45%.

Frequently Asked Questions (FAQ)

Q: What is the difference between Annualized Return and CAGR?

A: The terms are often used interchangeably, but CAGR (Compound Annual Growth Rate) strictly applies to a single investment’s growth. Annualized Return is a broader term that can also be applied to portfolios or fund performance where cash flows might be involved, though in this basic calculator, they use the same formula.

Q: Why is Annualized Return better than Total Return?

A: Total Return (e.g., 50% over 5 years) does not tell you anything about the investment’s duration. Annualized Return (8.45% per year) provides a rate that is comparable to other financial metrics, like bank interest rates or the performance of a stock over a different period.

Q: Can the Annualized Return be negative?

A: Yes. If the Final Investment Value is less than the Initial Investment Value (a loss), the resulting Annualized Return will be a negative percentage.

Q: Does this calculator account for deposits or withdrawals?

A: No, this simple calculation assumes a single lump-sum investment (Initial Value) with no further cash flows. For investments with ongoing contributions, you would need to use a Money-Weighted Rate of Return (MWRR) or Time-Weighted Rate of Return (TWRR) calculation.

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