The Compound Annual Growth Rate (CAGR) is a measure of an investment's annual growth rate over a period of time, assuming profits are reinvested at the end of each period12. It is a useful tool for evaluating the performance of investments over time, as it provides a smoothed rate of return that can be used to compare different investment options or to forecast future values23.
- Calculation Method: To calculate CAGR, you divide the value of an investment at the end of the period by its value at the beginning of that period, then raise the result to an exponent of one divided by the number of years. Subtract one from the subsequent result, and finally multiply by 100 to convert the answer into a percentage1.
- Usage Scenarios:
- CAGR can be used to calculate the average growth of a single investment, such as a stock or mutual fund2.
- It can also be used to compare the performance of different investments or to assess the behavior of various business measures over a series of years2.
- For example, if an investment increased in value by 8% in one year, decreased by -2% the following year, and increased by 5% in the next, the CAGR would help smooth these returns and provide a more consistent measure of performance2.
- Limitations: It's important to note that CAGR assumes a constant growth rate over the investment period, which may not be accurate for all investments. Additionally, CAGR does not reflect investment risk or the volatility of returns from year to year3.
In conclusion, CAGR is a valuable metric for investors and analysts alike, as it provides a clear picture of an investment's long-term growth rate and helps to compare the performance of different investment options over time.
7/26/2024 02:41am
