Compound Return

AAA

DEFINITION of 'Compound Return'

The rate of return, usually expressed as a percentage, that represents the cumulative effect that a series of gains or losses have on an original amount of capital over a period of time. Compound returns are usually expressed in annual terms, meaning that the percentage number that is reported represents the annualized rate at which capital has compounded over time.

When expressed in annual terms, a compound return can be referred to as a "compound annual growth rate (CAGR)".

INVESTOPEDIA EXPLAINS 'Compound Return'

For example, if an investment fund claims to have produced a 10% annual compound return over the past five years, this means that at the end of its fifth year, the fund's capital has grown to a size equal to what it would be if the funds on hand at the beginning of each year had earned exactly 10% by the end of each year.

In other words, suppose you started with an initial investment of $1,000. If you multiply 1,000 by 1.1 five times, you will end up with about $1,611. If an investment of $1,000 ended up being worth $1,611 by the end of five years, the investment could be said to have generated a 10% annual compound return over that five-year period.

However, this does not mean that the investment actually appreciated by 10% during each of the five years. Any pattern of growth that led to a final value of $1,611 after five years would equate to a 10% annualized return. Suppose the investment earned nothing for the first four years, and then earned $611 in its last year (a 61.1% return for the year). This would still equate to a 10% annual compound return over the five-year measurement period, since the final amount is still equal to what the $1,000 would have grown to if it had appreciated by a steady 10% each year.

RELATED TERMS
  1. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Compound Interest

    Interest calculated on the initial principal and also on the ...
  4. Capital

    1) Financial assets or the financial value of assets, such as ...
  5. Compound Net Annual Rate - CNAR

    The return on an investment after taking tax implications into ...
  6. Total Return

    When measuring performance, the actual rate of return of an investment ...
Related Articles
  1. Overcoming Compounding's Dark Side
    Investing Basics

    Overcoming Compounding's Dark Side

  2. Compound Annual Growth Rate: What You ...
    Forex Education

    Compound Annual Growth Rate: What You ...

  3. Using Normal Distribution Formula To ...
    Investing Basics

    Using Normal Distribution Formula To ...

  4. Can Investors Trust Official Statistics?
    Economics

    Can Investors Trust Official Statistics?

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center