Compound annual growth rate (CAGR) is the rate of return necessary for an investment to develop from its starting point to its ending point, with the assumption that benefits were reinvested towards the end of every year of the investments term.
Calculating the CAGR of an investment:
Divide the value of an investment at the end of the period by its value at the beginning of that period.
Raise the outcome to an exponent of one divided by the quantity of years.
Subtract one from the subsequent outcome.
CAGR= (EB/BB)1/n – 1
EB = Balance at the end of the term
BB = Balance at the beginning of the term
n = Number of years
The compound annual growth rate does not act as a true return rate, but rather is a figure just for representation. It is basically a number that portrays the pace at which an investment would have developed if it had grown the same pace every year and the benefits were reinvested towards the end of every year.
In the actual world, this sort of performance is quite impossible. In any case, CAGR can be utilized to smooth returns with the goal that they might be all the more handily comprehended when contrasted with alternative investment opportunities.