The compound annual growth rate is the rate of return that an investment would need to have every year in order to grow from its beginning balance to its ending balance, over a given time interval. The CAGR assumes that any profits were reinvested at the end of each period of the investment’s life span.

• The compounded annual growth rate (CAGR) is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
• It measures a smoothed rate of return.
• Investors can compare the CAGR of two or more alternatives to evaluate how well one stock performed against other stocks in a peer group or a market index.
• CAGR is thus a good way to evaluate how different investments have performed over time, or against a benchmark.
• The CAGR does not, however, reflect investment risk.

Formula

where EV = “Ending Value”, BV = “Beginning Value”, n = “Number of years”

References

• https://www.investopedia.com/terms/c/cagr.asp