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CAGR Formula:
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The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified time period 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 initial balance to its ending balance, assuming the profits were reinvested at the end of each period.
Details: CAGR is important because it provides a smoothed annual rate that eliminates the effects of volatility and provides a clearer picture of investment performance over time. It's widely used to compare the historical returns of stocks, mutual funds, and other investments.
Tips: Enter the starting and ending values in USD, and the number of years the investment was held. All values must be positive numbers with periods (years) greater than zero.
Q1: What's the difference between CAGR and average annual return?
A: CAGR accounts for compounding while average return doesn't. CAGR gives the geometric mean return while average return gives the arithmetic mean.
Q2: What are good CAGR values?
A: This depends on the investment type. For stocks, 7-10% might be good, while for startups, investors might expect 30%+.
Q3: What are the limitations of CAGR?
A: CAGR doesn't account for investment risk or volatility. It assumes smooth growth which rarely happens in reality.
Q4: Can CAGR be negative?
A: Yes, if the ending value is less than the starting value, CAGR will be negative, indicating a loss.
Q5: How is CAGR different from annualized return?
A: They're essentially the same concept, though annualized return might be used for periods less than one year.