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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 profits were reinvested at the end of each period.
Details: CAGR is widely used to compare the historical returns of different investments, evaluate investment performance, and forecast future growth. It smooths out the volatility of periodic returns to provide a clearer picture of long-term performance.
Tips: Enter the starting value, ending value, and number of years. All values must be positive numbers. The result will be displayed as a percentage representing the average annual growth rate.
Q1: What is a good CAGR value?
A: A "good" CAGR depends on the investment type and market conditions. Generally, higher CAGR is better, but it should be compared against relevant benchmarks and inflation rates.
Q2: How is CAGR different from average annual return?
A: CAGR accounts for compounding effects, while simple average return does not. CAGR provides a more accurate representation of investment performance over multiple periods.
Q3: Can CAGR be negative?
A: Yes, if the ending value is less than the starting value, CAGR will be negative, indicating an average annual decline in value.
Q4: What are the limitations of CAGR?
A: CAGR assumes smooth growth and doesn't account for volatility or the sequence of returns. It may not reflect the actual year-to-year performance.
Q5: How can I use CAGR for investment decisions?
A: Use CAGR to compare different investment options, assess long-term performance, and set realistic growth expectations for future investments.