Compound Annual Growth Rate - CAGR



The year-over-year growth rate of an investment over a specified period of time.

The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

This can be written as follows:

Compound Annual Growth Rate (CAGR)


CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.

Don't worry if this concept is still fuzzy to you - CAGR is one of those terms best defined by example. Suppose you invested $10,000 in a portfolio on Jan 1, 2005. Let's say by Jan 1, 2006, your portfolio had grown to $13,000, then $14,000 by 2007, and finally ended up at $19,500 by 2008.

Your CAGR would be the ratio of your ending value to beginning value ($19,500 / $10,000 = 1.95) raised to the power of 1/3 (since 1/# of years = 1/3), then subtracting 1 from the resulting number:

1.95 raised to 1/3 power = 1.2493. (This could be written as 1.95^0.3333).
1.2493 - 1 = 0.2493
Another way of writing 0.2493 is 24.93%.

Thus, your CAGR for your three-year investment is equal to 24.93%, representing the smoothed annualized gain you earned over your investment time horizon.

Go further with your knowledge of CAGR. Read Compound Annual Growth Rate: What You Should Know 


  1. Absolute Return Index

    A stock index designed to measure absolute returns. The absolute return index ...
  2. Time-Weighted Rate of Return

    A measure of the compound rate of growth in a portfolio. Because this method ...
  3. Return

    The gain or loss of a security in a particular period. The return consists of ...
  4. Rule Of 72

    A rule stating that in order to find the number of years required to double ...
  5. Growth Investing

    A strategy whereby an investor seeks out stocks with what they deem good growth ...
  6. Compound Return

    The rate of return, usually expressed as a percentage, that represents the cumulative ...
  7. Average Return

    The simple mathematical average of a series of returns generated over a period ...
  8. Estimated Current Return

    The estimated return for a unit investment trust over the short term. The estimated ...
  9. Estimated Long-Term Return

    A unit investment trust's estimated return over the life of the portfolio, calculated ...
  10. Average Annual Growth Rate - AAGR

    The average increase in the value of an individual investment or portfolio over ...
Related Articles
  1. Overcoming Compounding's Dark Side
    Investing Basics

    Overcoming Compounding's Dark Side

  2. Compound Annual Growth Rate: What You ...
    Forex Education

    Compound Annual Growth Rate: What You ...

  3. Compound Annual Growth Rate (CAGR)

    Compound Annual Growth Rate (CAGR)

    By Free
  4. What is the difference between stated ...

    What is the difference between stated ...

  5. 3 Midyear Portfolio Tune Up Tips For ...
    Mutual Funds & ETFs

    3 Midyear Portfolio Tune Up Tips For ...

  6. Avoid ETFs With These Traits
    Mutual Funds & ETFs

    Avoid ETFs With These Traits

  7. Disturbing Headlines, Strong Equity ...

    Disturbing Headlines, Strong Equity ...

  8. An Introduction To Target Date Funds

    An Introduction To Target Date Funds

  9. “Cautious” Investors: Saying One Thing, ...

    “Cautious” Investors: Saying One Thing, ...

  10. “Cautious” Investors: Saying One Thing, ...

    “Cautious” Investors: Saying One Thing, ...

comments powered by Disqus
Hot Definitions
  1. Through Fund

    A type of target-date retirement fund whose asset allocation includes higher risk and potentially higher return investments "through" the fund's target date and beyond.
  2. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold or disposed of first.
  3. Variable Universal Life Insurance - VUL

    A form of cash-value life insurance that offers both a death benefit and an investment feature. The premium amount for variable universal life insurance (VUL) is flexible and may be changed by the consumer as needed, though these changes can result in a change in the coverage amount.
  4. Monetary Policy

    The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).
  5. Weak Shorts

    Traders or investors who hold a short position in a stock or other financial asset who will close it out at the first indication of price strength. Weak shorts are typically investors with limited financial capacity, which may preclude them from taking on too much risk on a single short position.
  6. Bargain Purchase Option

    An option in a lease agreement that allows the lessee to purchase the leased asset at the end of the lease period at a price substantially below its fair market value. The bargain purchase option is one of four criteria, any one of which, if satisfied, would require the lease to be classified as a capital or financing lease that must be disclosed on the lessee's balance sheet.
Trading Center