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

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

Where:

• \( final \) — Ending value of the investment
• \( initial \) — Beginning value of the investment
• \( years \) — Number of years the investment was held

Explanation: The formula calculates the smoothed annualized gain of an investment over a period of time, assuming the investment grows at a steady rate each year.

3. Importance of CAGR Calculation

Details: CAGR is useful for comparing the historical returns of different investments, evaluating investment performance over time, and projecting future growth based on past performance.

4. Using the Calculator

Tips: Enter the initial investment amount, final value, and the number of years the investment was held. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's a good CAGR for stocks?
A: Historically, the S&P 500 has returned about 10% annually (including dividends). A CAGR above this would be considered excellent.

Q2: Does CAGR account for volatility?
A: No, CAGR smooths returns and doesn't reflect the actual year-to-year volatility an investment might experience.

Q3: When is CAGR most useful?
A: CAGR is most useful for comparing investments with different volatility patterns over the same time period.

Q4: What are limitations of CAGR?
A: It assumes steady growth, ignores volatility, and can be misleading if used to compare investments of different durations.

Q5: How does CAGR differ from annualized return?
A: They're essentially the same concept, though CAGR is typically used for longer time periods while annualized return can refer to any period.