DEFINITION
The yearoveryear 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:
INVESTOPEDIA EXPLAINS
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 threeyear 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
VIDEO
RELATED TERMS

Absolute Return Index
A stock index designed to measure absolute returns. The absolute return index ... 
TimeWeighted Rate of Return
A measure of the compound rate of growth in a portfolio. Because this method ... 
Return
The gain or loss of a security in a particular period. The return consists of ... 
Rule Of 72
A rule stating that in order to find the number of years required to double ... 
Growth Investing
A strategy whereby an investor seeks out stocks with what they deem good growth ... 
Compound Return
The rate of return, usually expressed as a percentage, that represents the cumulative ... 
Average Return
The simple mathematical average of a series of returns generated over a period ... 
Estimated Current Return
The estimated return for a unit investment trust over the short term. The estimated ... 
Estimated LongTerm Return
A unit investment trust's estimated return over the life of the portfolio, calculated ... 
Average Annual Growth Rate  AAGR
The average increase in the value of an individual investment or portfolio over ...
Related Articles

Investing Basics
Overcoming Compounding's Dark Side

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

Forex
Compound Annual Growth Rate (CAGR)

Investing
What is the difference between stated ...

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

Mutual Funds & ETFs
Avoid ETFs With These Traits

Investing
Disturbing Headlines, Strong Equity ...

Retirement
An Introduction To Target Date Funds

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

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