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CAGR Formula:
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Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
The calculator uses the CAGR formula:
Where:
Explanation: The formula calculates the constant rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming profits were reinvested at the end of each period.
Details: CAGR is widely used to compare the historical returns of stocks, mutual funds, and other investments. It smooths out the volatility and provides a clearer picture of long-term performance.
Tips: Enter the beginning value (purchase price), ending value (current price), and number of years you've held the investment. All values must be positive numbers.
Q1: What is a good CAGR for stocks?
A: A CAGR of 8-10% is generally considered good for stocks, matching long-term market averages. Higher CAGRs indicate better performance.
Q2: Does CAGR account for volatility?
A: No, CAGR smooths out volatility and assumes steady growth. It doesn't reflect the actual year-to-year fluctuations in returns.
Q3: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a loss over the period.
Q4: How is CAGR different from average annual return?
A: CAGR accounts for compounding, while average annual return is a simple arithmetic mean. CAGR is generally more accurate for investment analysis.
Q5: What are the limitations of CAGR?
A: CAGR doesn't consider investment risk, volatility, or cash flows during the period. It assumes smooth, consistent growth which rarely happens in reality.