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CAGR Formula:
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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 beginning balance to its ending balance, assuming the profits were reinvested at the end of each period.
Details: CAGR provides a smoothed annual rate that eliminates the volatility of periodic returns. It's widely used to compare the historical performance of different investments and to project future growth.
Tips: Enter the beginning value and ending value in dollars, and the number of years over which the growth occurred. All values must be positive numbers.
Q1: What is the difference between CAGR and average annual return?
A: CAGR accounts for compounding effect while average annual return does not. CAGR provides a more accurate representation of investment performance over multiple periods.
Q2: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a loss over the period.
Q3: What are typical CAGR values for different investments?
A: Stock market investments typically range from 7-10% CAGR, bonds 3-5%, while high-risk investments may show higher or negative returns.
Q4: Does CAGR account for volatility?
A: No, CAGR smooths out volatility and assumes steady growth. It doesn't reflect the actual year-to-year fluctuations in returns.
Q5: When should I not use CAGR?
A: CAGR is less useful for investments with irregular cash flows, or when you need to understand year-to-year volatility and risk.