Use the Annualized Return Calculator to quickly find the Compound Annual Growth Rate (CAGR) of your investment, or solve for the Future Value, Initial Investment, or Time needed to reach your financial goals.
Annualized Return Calculator
Calculated Result
Annualized Return Calculator Formula
Formula to solve for Rate (Annualized Return, AR):
$$AR = [ ( \frac{FV}{PV} )^{1/t} - 1 ] \times 100\%$$
Formula Source: Investopedia (CAGR), Harvard Business Review
Variables
The calculator uses four interconnected variables. You must enter any three to solve for the fourth one.
- Initial Investment (PV): The principal amount you start with.
- Final Amount (FV): The total amount, including initial investment and accrued earnings, at the end of the period.
- Time Period (Years, t): The length of the investment in years.
- Annualized Return (Rate, AR): The constant rate of return (expressed as a percentage) that yields the final amount over the time period.
Related Calculators
Explore other essential financial tools:
- Net Present Value (NPV) Calculator
- Future Value of Annuity Calculator
- Internal Rate of Return (IRR) Calculator
- Simple Return on Investment (ROI) Calculator
What is Annualized Return?
Annualized Return, often referred to as Compound Annual Growth Rate (CAGR), is a critical metric used to determine the rate of return required for an investment to grow from its initial balance (Present Value) to its final balance (Future Value) over a specific time period. Unlike simple return, the annualized return smooths out volatility and provides a single, average growth rate, assuming returns were compounded annually.
This metric is highly valued in financial analysis because it allows for an “apples-to-apples” comparison of different investment options. When evaluating two investment funds over, say, seven years, simply looking at the total percentage gain can be misleading. CAGR accounts for the time element, providing a standardized, geometric mean rate of return that truly reflects investment performance over the entire period.
How to Calculate Annualized Return (Example)
Suppose you invested $50,000 and it grew to $75,000 after 6 years. Here is how the calculator determines the Annualized Return (AR):
- Identify Variables: Initial Investment (PV) = $50,000; Final Amount (FV) = $75,000; Time (t) = 6 years.
- Apply the Formula: $AR = [ ( \frac{75,000}{50,000} )^{1/6} – 1 ] \times 100\%$
- Simplify the Ratio: $AR = [ ( 1.5 )^{1/6} – 1 ] \times 100\%$
- Calculate the Root: $1.5^{1/6} \approx 1.0699$
- Find the Rate: $AR \approx (1.0699 – 1) \times 100\% = 6.99\%$
- Conclusion: The Annualized Return is approximately 6.99%.
Frequently Asked Questions (FAQ)
What is the difference between Annualized Return and Simple Return? Simple return only measures the percentage gain over the period, ignoring the time factor. Annualized return (CAGR) calculates the effective constant rate of return over that time, making it a much better tool for long-term comparison.
Does this calculator account for monthly contributions? No, the basic CAGR formula used here assumes a single lump-sum initial investment. Calculating returns with periodic contributions requires more complex financial formulas (like Future Value of a Series).
Why is the calculated time period sometimes a decimal? The time period is calculated precisely to solve the formula. For example, a result of 10.5 years means 10 years and 6 months are required to achieve the target.
What are the limitations of CAGR? CAGR is historical and does not predict future returns. It also doesn’t reflect the volatility or sequence of returns—it’s an average, not the actual year-by-year performance.