How To Calculate an Annualized Rate of Return

Determine the initial investment required. Some investments like annuities may require a minimum investment while others, like stocks, usually allow you to invest as much or little as you want.

Determine the length of the investment in years. An investment of 18 months would be 1.5 years.

Estimate how much your contribution will be worth at the end of the investment, also known as the maturity. Some investments like an annuity will have a scheduled payout that you can use. Others, like stocks, require you to predict the future value.

Use the following formula where I is the investment amount, M is the value at maturity and Y is the number of years.

Annualized Rate of Return = (1 + M / I) ^ (1 / Y) - 1 An investment that costs $10,000 and will be worth $15,000 in five years would have an annualized rate of return of just over 20 percent.