Should I annualize the return of a one-month backtest?

It is mathematically possible and usually misleading. A single month contains too few independent periods for its growth rate to predict a year. Report the actual period return with its length instead.

What is the difference between CAGR and average annual return?

The average annual return is the arithmetic mean of yearly returns; the CAGR is the geometric rate that links the start and end values. With volatile returns the arithmetic mean is higher. A +50% year followed by a −50% year averages 0% but has a CAGR of about −13.4%.

CAGR (compound annual growth rate)

The compound annual growth rate (CAGR) is the constant yearly rate that would take a starting value to an ending value over a given number of years: (end ÷ start)^(1 ÷ years) − 1. It describes average growth as if it had been smooth, and needs a capital base to be defined.

Senzoukria · Glossary · Updated September 2026

At a glance

Formula: (End ÷ Start)^(1 ÷ years) − 1
Example: 50,000 → 65,000 in 2.5 years ≈ 11.07% per year
Requires: A starting capital and no unaccounted deposits or withdrawals
Used in: Calmar and MAR ratios

Computation

An account that grows from 50,000 to 65,000 in two and a half years has a growth multiple of 1.3. Raising 1.3 to the power 1 ÷ 2.5 gives about 1.1107, so the CAGR is about 11.07% per year. Checking the reverse: 1.1107 compounded for 2.5 years returns 1.3. The arithmetic average of the yearly returns can differ from the CAGR when returns vary from year to year, because the CAGR is a geometric average.

Where it misleads

Short periods. A 4% gain in one month annualizes to (1.04)¹² − 1 ≈ 60%, a figure that says more about the exponent than about the strategy.
Cash flows. Deposits and withdrawals change the ending value without being performance. A time-weighted return, chaining the returns between cash flows, is the correct measure then.
Accounts that reset. A prop firm evaluation is bought, passed or failed, and replaced; its balance is not a capital that compounds, and its economics are better described by cost per payout and net cash than by a growth rate.
Path blindness. Two accounts with the same CAGR can have had very different drawdowns, which is why the Calmar ratio divides it by the maximum drawdown.

In Senzoukria

Replay sessions and automatic backtests report results in dollars per contract size traded, with fees and a point value, but without an account balance: the cumulative trade curve starts at zero. The software therefore does not display a CAGR, and its percentage figures, such as Max drawdown %, are relative to the peak of cumulative profit rather than to capital. To express a long automatic backtest as a CAGR, choose the capital you would actually commit, add the net result to it, and apply the formula over the covered period, which the Performance panel shows as the days actually covered. For prop firm accounts, the prop simulation reports cash flows, payouts and cost per payout instead of a growth rate.

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Frequently asked questions

Should I annualize the return of a one-month backtest?: It is mathematically possible and usually misleading. A single month contains too few independent periods for its growth rate to predict a year. Report the actual period return with its length instead.
What is the difference between CAGR and average annual return?: The average annual return is the arithmetic mean of yearly returns; the CAGR is the geometric rate that links the start and end values. With volatile returns the arithmetic mean is higher. A +50% year followed by a −50% year averages 0% but has a CAGR of about −13.4%.

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