Suppose you invest $100 this year and next year in an investment that produces a 10 percent annual return. How much have you made by the end of year two? If you answered 21 percent, then you deserve a gold star and a trip to the head of the class. The algebra is simple. Your $100 grows to $110 at the end of year one. Next year, you also earn 10 percent on the $110 you start with, so you have $121 at the end of year two. Thus, the total return over the two-year period is 21 percent.
