Compound Annual Growth Rate (CAGR)
investmentAlso known as: CAGR, compound annual growth rate, annualized return
Updated · Written and reviewed by Konstantin Iakovlev
Detailed explanation
A $10,000 investment that grew to $20,000 over 7 years has a CAGR of (20000/10000)^(1/7) − 1 = 10.41%. CAGR smooths volatility — the same 7-year path could have included a 50% drawdown and a triple. Use cases: comparing investments with different time horizons, comparing fund returns to benchmark indexes, calculating required return to hit a goal. Limitations: hides volatility (Sharpe ratio addresses this), assumes a single beginning and ending point (TWRR or MWRR are better for accounts with deposits/withdrawals), can be misleading for short periods. A 100% return in year 1 followed by 0% in year 2 is a 41.4% CAGR — looks impressive but the second-year stagnation is invisible.
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