Calculate Compound Average Growth Rate

CAGR Formula:

\[ CAGR = \left[\left(\frac{\text{Ending Value}}{\text{Beginning Value}}\right)^{\frac{1}{\text{Periods}}} - 1\right] \times 100 \]

Compound Average Growth Rate (CAGR):

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1. What Is Compound Average Growth Rate?

Compound Average Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

\[ CAGR = \left[\left(\frac{\text{Ending Value}}{\text{Beginning Value}}\right)^{\frac{1}{\text{Periods}}} - 1\right] \times 100 \]

Where:

\( \text{Ending Value} \) — Final value of the investment
\( \text{Beginning Value} \) — Initial value of the investment
\( \text{Periods} \) — Number of years or periods

Explanation: CAGR smooths the growth rate as if the investment had grown at a steady rate on an annually compounded basis.

3. Importance of CAGR Calculation

Details: CAGR is widely used to compare the historical returns of stocks, mutual funds, and other investments. It helps investors understand the average annual growth rate of their investments over multiple periods.

4. Using the Calculator

Tips: Enter the beginning value, ending value, and number of periods in years. All values must be positive numbers with beginning and ending values greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good CAGR percentage?
A: A good CAGR depends on the investment type and market conditions. Generally, 7-10% is considered good for stock investments, but this varies by risk tolerance and investment goals.

Q2: How is CAGR different from average annual return?
A: CAGR accounts for compounding effect, while simple average return does not. CAGR provides a more accurate representation of investment performance over time.

Q3: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a loss over the period.

Q4: What are the limitations of CAGR?
A: CAGR assumes smooth growth and doesn't account for volatility or intermediate cash flows. It may not reflect the actual year-to-year performance.

Q5: How can I use CAGR for investment decisions?
A: Use CAGR to compare different investment options, evaluate fund performance, and set realistic return expectations for long-term financial planning.