CAGR = (Ending Value / Beginning Value)^((1 / n) - 1) where n is the length of time of the investment in years. See also: Average Annual Growth Rate.
What Does Compound Annual Growth Rate (CAGR) Mean? The year-over-year growth rate of an investment over a specified period; calculated by taking the (N)th root of the total percentage growth rate, where (N) is the number of years in the period being considered. It is expressed as follows:
Investopedia explains Compound Annual Growth Rate (CAGR) In reality, CAGR is not the actual return but an imaginary number that describes the rate at which an investment would have grown if it had grown at a steady rate. CAGR can be thought of as a way to smooth out returns. This concept may seem fuzzy, and CAGR is better defined by example. Suppose you invest $10,000 in a portfolio on January 1, 2005, and it grows to $13,000 by January 1, 2006, then to $14,000 by 2007, and finally to $19,500 by 2008. Your CAGR would be the ratio of your ending value to your beginning value ($19,500/$10,000 = 1.95) raised to the power of 1/3 (since 1/number of years = 1/3). Then 1 is subtracted from the resulting number: 1.95 raised to 1/3 power = 1.2493. (This could be written as 1.95^0.3333.) 1.2493 - 1 = 0.2493. Another way of writing 0.2493 is 24.93%. The CAGR for your three-year investment is equal to 24.93%, representing the smoothed-out annualized gain earned over the time frame of the investment.
Related Terms:
• Compounding
• Duration
• Growth Stock
• Interest Rate
• Yield
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