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Compound Annual Growth Rate (CAGR)

CAGR converts an investment’s total return over several years into a single annual rate, as if it had grown at the same rate every year. When fund, stock or index returns are quoted over periods of different length, the correct way to compare them is to convert them to a compound annual rate.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Worked example
  4. 4.Interpretation
  5. 5.Pitfalls
  6. 6.Frequently asked questions

Key Points

  • A simple average ignores compounding and gives misleading results.
  • CAGR puts different investments and periods on a common scale.
  • CAGR hides volatility within the period; the same result may come from a calm or a very bumpy path.

Formula / Calculation

CAGR = (Ending value / Beginning value)^(1 / Years) − 1. From a total return: (1 + Total return)^(1 / Years) − 1. For a real annual return, run the same calculation on inflation-adjusted values.

Worked Example

Illustrative

If TRY 100,000 invested in a fund three years ago is worth TRY 250,000 today, the total return is 150% and the CAGR is (250,000 / 100,000)^(1/3) − 1 ≈ 35.7%. A simple average (150% / 3 = 50%) would overstate the return.

The figures are hypothetical values chosen to explain the concept; they are not data for any real fund, stock or market.

Interpretation

CAGR puts different investments and periods on a common scale. In high-inflation periods, comparing nominal CAGR with annual inflation over the same period shows the real gain.

Pitfalls

CAGR hides volatility within the period; the same result may come from a calm or a very bumpy path. The choice of start and end dates changes the result substantially. Past compound returns are not a guide to future returns.

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Frequently Asked Questions

CAGR converts an investment’s total return over several years into a single annual rate, as if it had grown at the same rate every year.

CAGR = (Ending value / Beginning value)^(1 / Years) − 1. From a total return: (1 + Total return)^(1 / Years) − 1. For a real annual return, run the same calculation on inflation-adjusted values.

Prepared by: Yatırımcı.AI Research TeamLast reviewed: Method: MethodologyEditorial policy