Compound Annual Growth Rate - CAGR

AAA

DEFINITION of '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)

 

INVESTOPEDIA EXPLAINS '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 = 0.2493Another 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 

VIDEO

Loading the player...
RELATED TERMS
  1. Capital Growth

    The increase in value of an asset or investment over time. It ...
  2. Compound Interest

    Interest calculated on the initial principal and also on the ...
  3. Compound Net Annual Rate - CNAR

    The return on an investment after taking tax implications into ...
  4. Exponential Growth

    A pattern of increasing prices that resembles the curve of an ...
  5. Sequential Growth

    A measure of a company's short-term financial performance that ...
  6. Technical Analysis of Stocks and ...

    The academic study of historical chart patterns and trends of ...
RELATED FAQS
  1. What percentage of the global economy is comprised of the financial services sector?

    It's difficult to know the precise size of the global financial services sector. The World Bank only collects data from 142 ... Read Full Answer >>
  2. When computing the PEG ratio for a stock, how is a company's earnings growth rate ...

    Remember that the price/earnings to growth ratio (PEG ratio) is simply a given stock's price/earnings ratio (P/E ratio) divided ... Read Full Answer >>
  3. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  4. Why is the compound annual growth rate (CAGR) misleading when assessing long-term ...

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  5. How do I take qualitative factors into consideration when using fundamental analysis?

    Fundamental analysis is the method of analyzing companies based on factors that affect their intrinsic value. There are two ... Read Full Answer >>
  6. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  7. What are the main differences between compound annual growth rate (CAGR) and internal ...

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. The ... Read Full Answer >>
  8. How can the price-to-earnings (P/E) ratio mislead investors?

    The price-to-earnings (P/E) ratio is calculated by dividing a company’s stock price per share by its earnings per share (EPS), ... Read Full Answer >>
  9. What is a growth recession?

    A growth recession is an instance in which an economy grows at such a slow pace that it creates net unemployment, meaning ... Read Full Answer >>
  10. What's the difference between bottom-line and top-line growth?

    A company's bottom line is its net income, or the "bottom" figure on a company's income statement. More specifically, the ... Read Full Answer >>
  11. How does the required rate of return affect the price of a stock, in terms of the ...

    First, a quick review: the required rate of return is defined as the return, expressed as a percentage, that an investor ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Growth Investing

    Growth investing is a strategy where an investor seeks out companies demonstrating signs of high earnings that are well above the average rate compared to other firms in their industry and within ...
  2. Investing

    The Effective Annual Interest Rate

    The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
  3. Fundamental Analysis

    The Value of Profitability Ratios

    How is a company being run? Is it generating profits? The answer to these questions lies in analyzing the profitability ratios of a company.
  4. Investing Basics

    Introduction To Growth Investing

    There are principles and techniques that are applicable for many different types of investors and growth strategies.
  5. Investing Basics

    The Power Of Dividend Growth

    Dividends may not seem exciting, but they can certainly be lucrative. Learn more here!
  6. Trading Strategies

    Using Compound Indicators To Predict Market Fluctuations

    Learn how to combine average true range, simple moving average and Bollinger band indicators to gauge market volatility.
  7. Markets

    Is Growth Always A Good Thing?

    Getting big quickly looks good, but companies can get into trouble when they do it too fast. Find out how to spot this trouble.
  8. Investing Basics

    Portfolio Growth Strategies

    There are many ways to grow a portfolio, and the best approach for a given investor will depend upon various factors.
  9. Fundamental Analysis

    The Most Accurate Way To Gauge Returns: The Compound Annual Growth Rate

    The compound annual growth rate, or CAGR for short, represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios and anything that ...
  10. Investing Basics

    Growth Doesn't Matter For Mid Caps

    Featuring the right amount of growth and stability, mid caps represent a great opportunity to play the marketplace.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center