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Compound Annual Growth Rate (CAGR) Formula:
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The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios, and anything that can rise or fall in value over time.
The calculator uses the CAGR formula:
Where:
Explanation: The formula calculates the smoothed annualized gain of an investment, eliminating the effects of volatility and providing a single growth rate that if applied each year would take you from the initial value to the ending value.
Details: CAGR is important because it provides a constant rate of return over time, allowing investors to compare different investments and understand growth patterns regardless of volatility.
Tips: Enter the initial investment amount (PV), the final investment value (FV), and the investment period in years. All values must be positive numbers.
Q1: What's the difference between CAGR and annual return?
A: Annual return shows year-by-year performance, while CAGR shows the average annual growth rate over the entire period, smoothing out volatility.
Q2: What are good CAGR values for investments?
A: A "good" CAGR depends on the investment type and market conditions. Historically, stock market returns average 7-10% CAGR.
Q3: What are the limitations of CAGR?
A: CAGR doesn't account for investment risk or volatility, and assumes steady growth which rarely happens in reality.
Q4: Can CAGR be negative?
A: Yes, if the final value is less than the initial value, CAGR will be negative, indicating a loss.
Q5: How is CAGR different from absolute return?
A: Absolute return shows total percentage gain/loss, while CAGR shows the annualized rate that would achieve that total return.