Compound Annual Growth Rate (CAGR)

The Compound Annual Growth Rate, generally alluded to as CAGR, is the calculated average investment growth rate more than 12 months or longer. CAGR is just calculated on a single investment where money has not been added or taken out during the planned time span.

Features

• It measures a smoothed rate of return.
• CAGR is subsequently an effective method for assessing how various investments have performed over the long run, or against a benchmark.
• The CAGR doesn't, notwithstanding, reflect investment risk.
• Investors can compare the CAGR of at least two alternatives to assess how well one stock performed against different stocks in a peer group or a market index.
• The compounded annual growth rate (CAGR) is one of the most dependable ways of working out and decide returns for whatever can rise or fall in value over the long haul.

FAQ

Could the CAGR at any point Be Negative?

Indeed. A negative CAGR would show losses over the long haul instead of gains.

What Is Risk-Adjusted CAGR?

To compare the performance and risk qualities among different investment alternatives, investors can utilize a risk-adjusted CAGR. A simple method for working out a risk-adjusted CAGR is to duplicate the CAGR by one minus the investment's standard deviation. In the event that the standard deviation (i.e., its risk) is zero, the risk-adjusted CAGR is unaffected. The larger the standard deviation, the lower the risk-adjusted CAGR will be.

What Is the Difference Between the CAGR and a Growth Rate?

The principal difference between the CAGR and a growth rate is that the CAGR expects the growth rate was rehashed, or "compounded," every year, though a traditional growth rate doesn't. Numerous investors lean toward the CAGR in light of the fact that it smooths out the unpredictable idea of year-by-year growth rates. For example, even an exceptionally beneficial and effective company will probably have several years of poor performance during its life. These terrible years could to a great extent affect individual years' growth rates however would smallly affect the company's CAGR.

What Is Considered a Good CAGR?

What considers a decent CAGR will rely upon the specific circumstance. Yet, generally talking, investors will assess this by contemplating their opportunity cost as well as the riskiness of the investment. For instance, in the event that a company developed by 25% in an industry with an average CAGR nearer to 30%, then its outcomes could appear to be dreary by comparison. In any case, in the event that the extensive growth rates were lower, for example, 10% or 15%, then its CAGR may be very impressive.In general, a higher CAGR is better.

What Is an Example of Compound Annual Growth Rate (CAGR)?

The CAGR is a measurement utilized by investors to work out the rate at which a quantity developed over the long haul. "Compound" signifies the way that the CAGR considers the effects of compounding, or reinvestment, over the long run. For instance, assume you have a company with revenue that developed from $3 million to $30 million over a span of 10 years. In that scenario, the CAGR would be around 25.89%.