Reviewed by David Chen, CFA. Specialized in Portfolio Analysis and Financial Modeling.
The Annualized Return Calculator helps you determine the Compound Annual Growth Rate (CAGR) of an investment, solve for the required initial or final value, or the necessary investment period.
Annualized Return Calculator
The Calculated Result is:
—Calculation Breakdown
Annualized Return Calculator Formula:
The calculation is based on the Compound Annual Growth Rate (CAGR) formula, where one variable is solved based on the others:
F = P * (1 + V)^Q
Where:
- P = Initial Investment (Present Value)
- F = Final Value (Future Value)
- V = Annualized Return (as a decimal)
- Q = Investment Period (Years)
Variables:
- Initial Investment (P): The principal amount or the starting value of the portfolio.
- Final Value (F): The value of the investment after the full investment period.
- Investment Period (Q): The number of years the investment has been held or is expected to be held.
- Annualized Return (V): The compounded rate of growth per year, expressed as a percentage.
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What is Annualized Return?
Annualized return, often interchangeable with Compound Annual Growth Rate (CAGR), represents the mean annual growth rate of an investment over a specified period longer than one year. It smooths out volatility and provides a consistent, yearly growth figure, assuming profits are reinvested each year.
Understanding annualized return is crucial for comparing the performance of different investments, as it puts them on an equal, time-weighted basis. A stock returning 50% over five years and another returning 50% over ten years have drastically different annualized returns.
It is important to note that the annualized return is a historical measure and does not guarantee future performance. It simply tells you what the average yearly growth rate was during the measured period.
How to Calculate Annualized Return (Example):
Let’s find the Annualized Return (V) when P = $10,000, F = $15,000, and Q = 5 years.
- Identify the missing variable: In this case, we are solving for Annualized Return (V).
- Use the correct formula: $V = (F/P)^{(1/Q)} – 1$.
- Substitute values: $V = (15000 / 10000)^{(1/5)} – 1$.
- Perform division: $F/P = 1.5$.
- Calculate the root: $1.5^{0.2} \approx 1.08447$.
- Final step: $V = 1.08447 – 1 = 0.08447$.
- Convert to percentage: The Annualized Return is approximately 8.45%.
Frequently Asked Questions (FAQ):
Is Annualized Return the same as Simple Return?
No. Simple return calculates total gain or loss over the period without considering compounding, while Annualized Return (CAGR) calculates the geometric average return on an annual basis, factoring in the effect of compounding.
Why is the Investment Period (Q) required?
The period is essential because the calculation must annualize the total return. Without the time period, you only have the total percentage change, not the average yearly growth rate.
What happens if the Final Value (F) is less than the Initial Investment (P)?
If F < P, the Annualized Return (V) will be negative, indicating an average annual loss over the investment period.
Can I use this to calculate monthly or quarterly returns?
Yes, but you must adjust the period (Q). If you want a monthly return, Q must be the number of months, and the resulting V will be the monthly return (not annualized).