Compound Annual Growth Rate - CAGR
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:
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 = 0.2493
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
Articles Of Interest
Understanding how money is made and lost over time can help you improve your returns.
The CAGR is a good and valuable tool to evaluate investment options, but it does not tell the whole story.
The compound annual growth rate is an important tool for measuring investment performance and comparing it across asset classes. Discover how it is calculated and how it can inform your investment ...
Essentially, the effective annual return accounts for intra-year compounding, and the stated annual return does not. The difference between these two measures is best illustrated with an example. ...
Do you know if you will have enough money in retirement? And is your current portfolio performing up to expectations?
Protecting your stock portfolio is an extremely important part of portfolio management.
Institutional investors are organizations that manage assets on others' behalf. They include pension funds, investment companies, insurance firms, endowments and private foundations.
In this article, we'll show you how investors at any stage of life can keep these fixed-income investments. Keep Reading.
Investopedia explains: Interest is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as simple interest or compound interest.
Investopedia explains: These five performance ratios will help you measure how good your money manager is at increasing the value of your portfolio.