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.
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