Compound Annual Growth Rate

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Calculate the growth rate of an investment over a period of time. Explanation of CAGR (Compound Annual Growth Rate).


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CAGR - Compound Annual Growth Rate

What is CAGR? Description

Compound Annual Growth Rate is the average annual growth rate of an investment over a specified period of time.

Calculation of Compound Annual Growth Rate. Formula

CAGR 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.

CAGR = ( ( End Value / Begin Value )(1 / N ) ) - 1

Usage of CAGR. Applications

  • Calculating and communicating the average returns of investment funds.
  • Demonstrating and comparing the performance of investment advisors.
  • Compare the historical returns of stocks with Bonds or with a savings account.

Strengths of CAGR. Benefits

  • It is a useful formula to evaluate how various investments or a portfolio has performed over time.
  • Can be used for comparing and for evaluating the performance of one stock against other stocks in a peer group or against a market index.

Limitations of CAGR. Disadvantages

  • CAGR assumes that an investment grew at a steady rate. In reality there is volatility: investment results can vary significantly over time. This volatility, or investment risk, is important to consider when one makes an investment decision.
  • CAGR is a historical measure. Historical results are not always a reliable indicator of expected returns in the future.
  • CAGR is sensitive to the period which you consider and it can be easily manipulated: an investment fund may tell you that it achieved an impressive CAGR of 35% over the last three years, but the Begin Value may be taken at a the lowest point that the fund ever had.

Assumptions of Compound Annual Growth Rate. Conditions

  • CAGR assumes that an investment grows at a steady pace. This is normally not the reality. Therefore CAGR is an imaginary conception. It describes the growth of an investment as though it had grown at a steady pace.

CAGR Forum (6 topics) Help
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  How to Calculate CAGR if the Beginning Data is negative (minus)?
How to calculate CAGR in the following case:
Profit in year 2011: 1200
Profit in year 2010: 1400
Profit in year 2009: - 500....

CAGR Calculation - Example 1

How to calculate CAGR for these export figures?
Export figures are for:
2005: Rs. 1205 cr.
2006: Rs. 995 cr.
2007: Rs. 1025 cr.
2008: Rs. 1150 cr....

Compound Annual Growth Rate: CAGR Formula

How is 1/n to the power calculated for CAGR? How does it needs to be considered for arriving at CAGR?...

CAGR and Employment Growth

Can CAGR measure employment growth or generation of enterprises?...

Basis of Compound Annual Growth Rate (CAGR)

For a company, generally CAGR is stated. So what is normally taken as a base for that? Profits? Capital? Something else?...

CAGR Calculation - Example 2

If net profit for year 2000 is 200 million and for year 2004 is 400 million, then what will be the CAGR?...
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7 Limitations of CAGR

Applying CAGR to Assess the Quality of a Firm's Management

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