Most of the time, investors are baffled by the different types of returns that experts toss at them. Without really understanding these concepts, it will be akin to comparing apples and oranges OR chalk and cheese.

• CAGR: The compound annual growth rate (CAGR) can be interpreted as the growth rate that gets you from the initial investment value to the final investment value if you assume the investment to compound over the time period.

Formula: CAGR = (EV / BV) ^ (1 / n-1) – 1

where:

EV = Investment’s final value

BV = Investment’s initial value

n   = Number of periods (months, years, etc.)

• IRR: IRR, known as the Internal Rate of Return states that if the return on a project or an investment is greater than the minimum required rate of return, typically the cost of capital, then the project or investment should be pursued. Conversely, if the IRR on a project or investment is lower than the cost of capital, then the project better be rejected.

Formula: 0 = P0 + P1/ (1+IRR) + P2/ (1+IRR)^2 + P3/ (1+IRR)^3 + . . . +Pn/ (1+IRR)^n

where P0, P1, . . ., Pn equals the cash flows in periods 1, 2, . . . n, respectively; and

IRR equals the project’s internal rate of return.

• XIRR: XIRR is the abbreviation of Extended Internal Rate of Return and is used to find the Return from investments done at different time periods.

Unlike CAGR, XIRR doesn’t have a stated formula; we need to use excel to calculate it.

XIRR formula in excel: XIRR (value, dates, guess)

Values are the transaction amounts, dates are the transaction dates, and guess is the approximate return.

• ROLLING RETURN: Rolling returns are annualized average returns for a period, ending with the listed year. Rolling returns are useful for examining the behavior of returns for holding periods, similar to those actually experienced by investors. Rolling returns are also known as ‘rolling period returns’ or ‘rolling time periods’