How to calculate AER

RomfordNavy

Can anyone tell me how to calculate the AER from a total return and period invested?
For example lets say an investment has returned 50% over 5 years, what is the AER.

eskbanker

The figure you're talking about would normally be referred to as compound annual growth rate (CAGR) and can easily be calculated in the likes of Excel - for five years you essentially need the fifth root of that 1.5 return, so the formula is simply 1.5^(1/5) = 1.0845, i.e. a CAGR of 8.45%.

RomfordNavy

eskbanker said:

The figure you're talking about would normally be referred to as compound annual growth rate (CAGR) and can easily be calculated in the likes of Excel - for five years you essentially need the fifth root of that 1.5 return, so the formula is simply 1.5^(1/5) = 1.0845, i.e. a CAGR of 8.45%.

Perfect, thanks.  Despite much googleing I couldn't find the answer as I didn't know it was called CAGR.

eskbanker

I should also highlight that if you do use Excel (other spreadsheet software is available), the RRI function achieves the same result in a slightly more elegant form:

Description

Returns an equivalent interest rate for the growth of an investment.

Syntax

RRI(nper, pv, fv)

The RRI function syntax has the following arguments.

• Nper    Required. Nper is the number of periods for the investment.

• Pv    Required. Pv is the present value of the investment.

• Fv    Required. Fv is the future value of the investment.

so in this case RRI(5,1,1.5) = 0.0845, i.e. 8.45%.