Home/Formulas/Annualized Return

Compound Growth

Annualized Return

Multi-period return converted to an equivalent constant annual rate, accounting for compounding.

01 / Formula

Formula

Annualized Return = (Ending Value ÷ Beginning Value)^(1 ÷ Years) − 1

02 / Variables

Variables

Ending Value: Portfolio value at end
Beginning Value: Portfolio value at start
Years: Number of years

03 / Worked Example

Worked Example

Scenario: An investment growing from $10,000 to $12,100 in 2 years has an annualized return of 10%.

Steps:

Divide 12,100 by 10,000 = 1.21
Calculate 1 ÷ 2 = 0.5
Raise 1.21 to power 0.5 = 1.10
Subtract 1 = 0.10 = 10%

04 / When to Use

When to Use This Formula

Compare investments of different time periods
Express multi-year returns as a yearly rate
Annualize performance for easier comparison

05 / Limitations

Limitations & Assumptions

Smooths year-to-year volatility
Does not account for contributions or withdrawals
Start and end date selection affects results significantly

06 / Questions

Common Questions

Is annualized return the same as average return?

No. Average return is arithmetic (simple average); annualized return is geometric (accounts for compounding).

More on this topic

Compound growth and regular investing

Reference note: This is an educational mathematical reference. The formula's applicability depends on assumptions, market conditions, and use case. Always verify results independently and consult domain experts for decisions.