Annualized Rate of Return Calculator
Calculate the Compound Annual Growth Rate (CAGR) — the smoothed annual return of an investment over a multi-year period.
How to use this tool
- Enter beginning value, ending value and number of years in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your annualized return (cagr) and the full breakdown beneath it.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
Formula
CAGR = (Ending Value / Beginning Value)1/n − 1
where n is the number of years. Multiply by 100 to express as a percentage.
How it works
The Compound Annual Growth Rate (CAGR) represents the steady annual return that would have grown the beginning value to the ending value over the given number of years, assuming annual compounding. It smooths out year-to-year volatility into a single representative rate. CAGR does not account for investment contributions, withdrawals, or the risk of the investment.
Worked example
$10,000 growing to $15,000 over 5 years
- Total gain = $15,000 − $10,000 = $5,000 (50% total return)
- CAGR = (15,000 / 10,000)^(1/5) − 1 = 1.5^0.2 − 1
- 1.5^0.2 = e^(0.2 × ln 1.5) = e^(0.2 × 0.405465) = e^0.08109 ≈ 1.08447
- CAGR ≈ 0.08447 = 8.45%
The annualized (CAGR) return is 8.45% per year, for a total gain of $5,000 (50%) over 5 years.
Common mistakes to avoid
- Entering the number of months instead of years for n, which drastically overstates or understates CAGR.
- Using CAGR as if it represents actual year-by-year returns — CAGR is a smoothed average and actual returns fluctuate widely each year.
- Forgetting to account for dividends or distributions reinvested: if payouts were not reinvested the ending value understates true return.
Key terms
- CAGR
- Compound Annual Growth Rate — the rate at which an investment would have grown if it grew at the same steady rate every year.
- Total return
- The overall percentage gain or loss from beginning to ending value, without annualizing.
- Compounding
- Earning returns on previously earned returns, causing exponential rather than linear growth.
- Beginning value
- The initial investment amount or portfolio value at the start of the measurement period.
Frequently asked questions
- What is the difference between CAGR and simple average return?
- CAGR compounds each year, accounting for the effect of gains on gains and losses on losses. Simple average just adds annual returns and divides, which overstates performance when returns are volatile.
- Can CAGR be negative?
- Yes. If the ending value is less than the beginning value, the result is a negative percentage, indicating an annualized loss.
- Does CAGR account for contributions or withdrawals during the period?
- No. CAGR only compares a single beginning value to a single ending value. For portfolios with ongoing contributions use the money-weighted rate of return (IRR) instead.