Question 1

What is CAGR?

Accepted Answer

CAGR (Compound Annual Growth Rate) measures the mean annual growth rate of an investment over a specified time period, assuming profits are reinvested. It smooths out volatility and gives a single annualized percentage that represents steady growth.

Question 2

How is CAGR calculated?

Accepted Answer

CAGR = (Ending Value / Beginning Value)^(1 / Years) - 1. For example, if an investment grows from $10,000 to $15,000 over 3 years, CAGR = (15000/10000)^(1/3) - 1 = 14.47% per year.

Question 3

What is a good CAGR?

Accepted Answer

For context, the S&P 500 has historically averaged about 10% CAGR before inflation. A CAGR above 10% is generally considered strong. Individual stocks or sectors may have much higher or lower CAGRs, and past performance does not guarantee future results.

Question 4

What is the difference between CAGR and average annual return?

Accepted Answer

Average annual return simply adds yearly returns and divides by the number of years. CAGR accounts for compounding and is always lower than or equal to the average when returns vary. CAGR is the more accurate measure of investment performance because it reflects geometric rather than arithmetic growth.

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