Definition
CAGR calculates the geometric mean annual growth rate over a specified time period, smoothing out volatility. Unlike simple average growth, CAGR accurately represents the constant rate that would produce the same total growth. It is essential for comparing investment performance over different time periods.
functions Formula
CAGR = (Ending Value / Beginning Value)^(1/n) − 1
lightbulb Example
A $10,000 investment grows to $20,000 over 5 years. CAGR = ($20K/$10K)^(1/5) − 1 = 14.87%. This is the steady annual rate that would produce the same result.
verified_user Key Points
- Smooths volatile year-to-year growth fluctuations
- Superior to arithmetic average for multi-year periods
- Used extensively in financial planning and projections
- Does not reflect interim volatility or risk