Compound Annual Growth Rate (CAGR)

Compound annual growth rate, or CAGR, is the mean annual growth rate of an asset over a quantified period of time lengthier than one year. It characterizes one of the most precise ways to calculate and govern returns for discrete assets, investment sets, and everything that can rise or fall in value over time.

The CAGR is a mathematical method that delivers a “smoothed” rate of arrival. It is really a pro forma number that tells you what an investment profits on an annually compounded basis — representing to investors what they really have at the end of the investment period.

How CAGR Works ?

To calculate the CAGR you take the nth root of the whole return, where n is the amount of years you held the investment. In this instance, you take the square root (because your investment was for two years) of 50 percent (the total return for the period) and find a CAGR of 22.5 percent.

 

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