What Is Compound Annual Growth Rate — CAGR?

Finance
#1

The compound annual growth rate (CAGR) is the rate of return necessary for an investment to increase from its initial balance to its final balance if the profits were reinvested at the end of each year of the investment’s life span. Investors can compare the CAGR of two options to see how one stock performed in comparison to other stocks in a peer group or a market index. The compound annual growth rate (CAGR) does not account for investment risk.

#2

As everyone had already given the formula. I’m just value adding to the above answer. CAGR is used to calculate the average compounded rate of return over a period of time. This formula has some limitation like it doesn’t tell you the actual fluctuation happen during the period, rather it gives you an average number.

Let’s assume you have invested Rs 100 in an investment scheme.

Year 1 : You have a return of 10% and your total amount becomes Rs 110

Year 2 : You again have a return of 10% but 10% of what? Is it 10 percent of 100 or 110?

Case 1 : If it is 10% of 110, your total amount becomes Rs 121.

Case 2 : If it is 10% of 100, your total amount becomes 120.

Case 1 is an example of compound interest and Case 2 is an example of simple interest.