1. What is Compound Annual Growth Rate (CAGR)?

Definition: CAGR is the mean annual growth rate of an investment over a specified time period longer than one year.

Purpose: It provides a smoothed annualized return that eliminates the volatility of periodic returns.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( CAGR \) — Compound Annual Growth Rate (%)
• \( EV \) — Ending Value
• \( BV \) — Beginning Value
• \( Y \) — Number of years

Explanation: The formula calculates the constant rate of return that would be required for an investment to grow from its beginning balance to its ending balance.

3. Importance of CAGR Calculation

Details: CAGR helps compare investments with different volatility patterns and time horizons on an equal basis.

4. Using the Calculator

Tips: Enter the beginning value, ending value, and number of years. All values must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good CAGR?
A: A "good" CAGR depends on the asset class and time period. Generally, higher is better, but should be compared to relevant benchmarks.

Q2: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a loss.

Q3: What are the limitations of CAGR?
A: CAGR doesn't account for investment risk, volatility, or cash flows during the period.

Q4: How is CAGR different from average annual return?
A: CAGR accounts for compounding, while average return simply divides total return by number of years.

Q5: Can I use CAGR for periods less than a year?
A: Technically yes, but it's designed for multi-year periods. For short periods, other metrics may be more appropriate.