Question 1

What is CAGR?

Accepted Answer

CAGR (Compound Annual Growth Rate) is the annualized rate of return that an investment would need to grow from its initial value to its final value over a specified period, assuming profits are reinvested each year.

Question 2

How is CAGR calculated?

Accepted Answer

CAGR is calculated using the formula: CAGR = (Final Value / Initial Value)^(1/n) - 1, where n is the number of years. It smooths out volatility and gives a single growth rate representing the investment performance.

Question 3

What is the difference between CAGR and absolute return?

Accepted Answer

Absolute return is the total percentage gain or loss on an investment without considering time. CAGR annualizes the return, making it useful for comparing investments of different durations. For example, 100% absolute return over 5 years equals a CAGR of about 14.87%.

Financial Calculators