What Is Compound Annual Growth Rate (CAGR)?
Compound Annual Growth Rate (CAGR) is a measure of the rate of return of an investment over a certain period of time. It is calculated by taking the average annual growth rate of a given investment over a defined period of time, usually 3 to 5 years. CAGR is a way to measure the return of an investment over a period of years, and is often used to compare the performance of different investments. CAGR is an important measure for investors to consider when deciding which investments to make. It can be used to compare different investments to determine which ones are likely to be more profitable in the future. CAGR also helps investors evaluate the effectiveness of their investment strategies.
How to Calculate Compound Annual Growth Rate (CAGR)
CAGR is calculated by taking the average annual growth rate of a given investment over a defined period of time. To calculate CAGR, you need to know the beginning and ending values of the investment, as well as the number of years it was held. The formula for CAGR is as follows: CAGR = (End Value / Start Value)^(1/Years) – 1 Let’s look at an example of how to calculate CAGR. Suppose you invested $10,000 in a stock five years ago, and the value of the stock is now $15,000. The CAGR of the investment is calculated as follows: CAGR = ($15,000 / $10,000)^(1/5) – 1 = 0.094 = 9.4% This means that the investment’s average annual growth rate over the five-year period was 9.4%.
Examples of Compound Annual Growth Rate (CAGR)
CAGR is used in a variety of ways to measure the performance of an investment. Here are a few examples: • Comparing the performance of different investments: CAGR can be used to compare the performance of different investments over the same period of time. This can help investors determine which investments are likely to be more profitable in the future. • Evaluating the effectiveness of an investment strategy: CAGR can be used to evaluate the effectiveness of an investor’s strategy over time. It can show whether the strategy is successful, or whether changes need to be made. • Measuring the growth of a company: CAGR can be used to measure the growth of a company over a period of time. This can help investors decide whether the company is likely to be a good investment in the future.
Conclusion
Compound Annual Growth Rate (CAGR) is an important measure for investors to consider when deciding which investments to make. It is calculated by taking the average annual growth rate of an investment over a defined period of time. CAGR can be used to compare the performance of different investments, evaluate the effectiveness of an investment strategy, and measure the growth of a company. These examples illustrate how CAGR can be used to measure the performance of an investment over time.
References
https://www.investopedia.com/terms/c/cagr.asp https://www.investopedia.com/ask/answers/09/comparing-cagr.asp https://www.investopedia.com/articles/investing/053116/how-calculate-compound-annual-growth-rate-cagr.asp