Investment
Compound Annual Growth (CAGR)
links a start, an end, and a time span with one equivalent rate; it does not recover the path between them.
Only the endpoints are known
If 100 becomes 200, did every year grow the same way?
Suppose we know only a starting value of 100, an ending value of 200, and the number of years. The actual path between them is unknown.
Start 100→ ? → ? → ? →End 200
What did you just see?
It compresses a multi-year change into one comparable annual rate.
Another example
- Enter a beginning value of 100,000 and an ending value of 150,000.
- Set the period to five years.
- The result is about 8.45% CAGR and 50% total return; 8.45% is the smoothed annual equivalent.
Show formal definition and formula
CAGR is the constant annual rate that links a beginning value to an ending value.
CAGR equals ending value divided by beginning value, raised to one over the number of years, minus one.
Common mistakes
Do not read CAGR as each year's actual return or ignore interim cash flows.
You can now explore…
- Annualize beginning-to-ending growth
- Why CAGR does not describe volatility
Term reference2 terms
Open a term when you need a reminder. Underlined words in the article work too.