Investment

What is CAGR?

CAGR is the constant annual rate that links a beginning value to an ending value.

Definition

CAGR is the constant annual rate that links a beginning value to an ending value.

Intuition

It compresses a multi-year change into one comparable annual rate.

Formula

CAGR = {(\frac{FV}{PV})}^{\frac{1}{n}} - 1

CAGR equals ending value divided by beginning value, raised to one over the number of years, minus one.

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.

Common mistakes

Do not read CAGR as each year's actual return or ignore interim cash flows.