# Compound Annual Growth Rate - CAGR

Compound Annual Growth Rate - CAGR
The year-over-year growth rate of an investment over a specified period of time.

The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

This can be written as follows:

CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.

Don't worry if this concept is still fuzzy to you - CAGR is one of those terms best defined by example. Suppose you invested \$10,000 in a portfolio on Jan 1, 2005. Let's say by Jan 1, 2006, your portfolio had grown to \$13,000, then \$14,000 by 2007, and finally ended up at \$19,500 by 2008.

Your CAGR would be the ratio of your ending value to beginning value (\$19,500 / \$10,000 = 1.95) raised to the power of 1/3 (since 1/# of years = 1/3), then subtracting 1 from the resulting number:

1.95 raised to 1/3 power = 1.2493. (This could be written as 1.95^0.3333).
1.2493 - 1 = 0.2493
Another way of writing 0.2493 is 24.93%.

Thus, your CAGR for your three-year investment is equal to 24.93%, representing the smoothed annualized gain you earned over your investment time horizon.

Investment dictionary. . 2012.

### Look at other dictionaries:

• Compound annual growth rate — (CAGR) is a business and investing specific term for the smoothed annualized gain of an investment over a given time period.[1] CAGR is not an accounting term, but remains widely used, particularly in growth industries or to compare the growth… …   Wikipedia

• compound annual growth rate — Annual return calculated based on each year s previous balances where each previous balance includes both the original principal and all interest accrued from prior years. Best defined by example. Bloomberg Financial Dictionary If you invest \$100 …   Financial and business terms

• Growth rate — may refer to:*Exponential growth, a growth rate classification *Compound annual growth rate or CAGR, a measure of financial growth *Economic growth, the increase in value of the goods and services produced by an economy *Growth rate (group… …   Wikipedia

• compound growth rate — See: compound annual growth rate * * * compound growth rate compound growth rate ➔ growth rate * * * compound growth rate UK US noun [C] (also compounded growth rate, ABBREVIATION CGR, also …   Financial and business terms

• Compound Return — The rate of return, usually expressed as a percentage, that represents the cumulative effect that a series of gains or losses have on an original amount of capital over a period of time. Compound returns are usually expressed in annual terms,… …   Investment dictionary

• Annual Return — The return an investment provides over a period of time, expressed as a time weighted annual percentage. Sources of returns can include dividends, returns of capital and capital appreciation. The rate of annual return is measured against the… …   Investment dictionary

• CAGR — Compound Annual Growth Rate (Business » General) Compound Annual Growth Rate (Business » International Business) * Combined Annual Growth Rate (Business » International Business) * Compounded Annualized Growth Rate (Academic & Science) *… …   Abbreviations dictionary

• CAGR — Compound Annual Growth Rate …   Acronyms

• CAGR — Compound Annual Growth Rate …   Acronyms von A bis Z

• CAGR — Als Wachstumsrate bezeichnet man die durchschnittliche relative Zunahme einer Größe pro Zeiteinheit. Dabei wird ein exponentieller Vorgang angenommen. Statt der Wachstumsrate wird in der Mathematik meist mit der Wachstumskonstante λ gerechnet.… …   Deutsch Wikipedia