In this article we would cover:
We will use this sample portfolio as an example -
Sundar invested Rs. 100 every first day of the month for three months. He then exited the portfolio at Rs. 310 exactly after three months.
A negative value represents outflow/investment/loss (money going out from your pocket). And Positive value represents the inflows/profit (money coming in your pocket).
Absolute return is the most basic way to calculate returns from an investment. It does not take the time factor into consideration. It simply considers only the amount gained/lost from an investment.
$$
\begin{equation*}Absolute\ return\ =\ \ \left(\frac{V_{final} \ -\ V_{initial}}{V_{initial}}\right)\end{equation*} $$
Sundar's absolute return would be $(310 - 300)/300 = 3.33%$
<aside> ⚠️ Notice that there's no time factor in the formula. This is a limitation that CAGR tries to solve.
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CAGR is a common metric used in the financial industry to calculate the annualized return of an investment.