Compound Annual Growth Rate (CAGR) Calculator
What is CAGR?
Compound Annual Growth Rate (CAGR) is a measure of an investment's annual growth rate over time, assuming the profits are reinvested at the end of each year of the investment's lifespan.
CAGR is widely used in finance to describe the growth rate of investments, revenue, or other financial metrics over multiple time periods.
How is CAGR calculated?
The formula for CAGR is:
CAGR = (Ending Value / Beginning Value)^(1/n) - 1
Where 'n' is the number of years. This formula calculates the rate at which an investment would grow if it grew at a steady rate.
Why CAGR is better than absolute returns
- It accounts for the effect of compounding
- It smooths out volatility in performance
- It allows for easy comparison between investments with different time frames
Limitations of CAGR
- It doesn't account for investment risk or volatility
- It assumes a constant growth rate, which is often not the case in real-world scenarios
- It can be sensitive to the choice of start and end dates
- It may not be suitable for short-term investments or those with irregular cash flows
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