If you also consider the effect of the time value of money and inflation, the real rate of return can also be defined as the net amount of discounted cash flows DCF received on an investment after adjusting for inflation. Real Rate of Return RoR vs.
Discounting is one way to account for the time value of money. The CAGR is the mean annual rate of return of an investment over a specified period of time longer than one year, which means the calculation must factor in growth over multiple periods.
To calculate compound annual growth rate, we divide the value of an investment at the end of the period in question by its value at the beginning of that period; raise the result to the power of one divided by the number of holding periods, such as years; and subtract one from the subsequent result.
Example of a Rate of Return RoR The rate of return can be calculated for any investment, dealing with any kind of asset. Let's take the example of purchasing a home as a basic example for understanding how to calculate the RoR.
Six years later, you decide to sell the house—maybe your family is growing and you need to move into a larger place.