How Do You Calculate Annual Rate of Return?
The compound annual growth rate, or CAGR, of an investment is calculated by dividing the ending value by the beginning value, taking the quotient to the power of one over the number of years the investment was held and subtracting the entire number by one. Then, turn the answer into a percentage from decimal form. The CAGR allows you to see an investment without all the ups and downs as if it had grown at an even, steady pace over the years.
- Divide the ending value by the beginning value
Start with the total return, and divide it by the amount that was initially invested. For example, if you invest $1,000 and five years later the investment is worth $5,000, you would divide $5,000 by $1,000, ending up with a result of $5.
- Take the quotient to the power of one over the number of years the investment was held
For example, take 5 to the power of 1 over 5, since the investment was held for five years, so 1 over 5 equals 0.2, and 5 to the power of 0.2 is 1.3797296614612.
- Subtract the answer by 1 to get CAGR
For example, take 1.3797296614612 and subtract it by 1, which is 0.3797296614612. The CAGR is rounded to 0.38, or 38 percent over five years.