What Is CAGR and How Is It Calculated?
Understand Compound Annual Growth Rate (CAGR), why it outperforms arithmetic average return, and how to apply the formula.
Table of Contents
Why Average Return Can Be Deceptive
Imagine investing $1,000. In Year 1 your portfolio gains +100% to $2,000. In Year 2 your portfolio falls -50% back down to $1,000.
The simple arithmetic average return is (+100% - 50%) / 2 = +25% per year. Yet you have made $0 in actual profit! CAGR eliminates this distortion by measuring true geometric compounding.
The CAGR Mathematical Formula
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1.
CAGR tells you the constant annual rate of growth that would have taken you from the starting balance to the final balance over that period.
Put this guide into practice
CAGR Calculator
Calculate Compound Annual Growth Rate (CAGR) over multiple investment years.
ROI Calculator
Calculate Return on Investment (ROI) percentage and annualized return rate.
Compound Interest Calculator
Calculate compound growth over time with customizable compounding frequencies and regular deposits.