CAGR (Compound Annual Growth Rate)

Compound Annual Growth Rate represents the rate at which an investment would have grown if it had increased at a steady rate each year over a given time period. Unlike simple average returns, CAGR accounts for compounding and provides a single smoothed annual rate that accurately reflects end-to-end growth regardless of year-to-year fluctuations.

For example, if a $10,000 investment grows to $19,000 over five years, the CAGR is approximately 13.7 percent per year, even though actual annual returns may have ranged from negative 10 to positive 30 percent during that period. This makes CAGR invaluable for comparing investments with different time horizons and volatility profiles.

CAGR is widely used in business to measure revenue growth, in finance to evaluate portfolio performance, and in education to teach the power of compounding. However, CAGR has limitations: it masks the volatility experienced during the investment period and assumes reinvestment of all gains. Two investments with identical CAGRs may have vastly different risk profiles, so CAGR should be considered alongside standard deviation and maximum drawdown.