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

CAGR (Compound Annual Growth Rate) 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:

• \( end \) — Ending value
• \( start \) — Starting value
• \( n \) — Number of years

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

3. Importance of CAGR Calculation

Details: CAGR is widely used to compare the historical performance of different investments, to project future values, and to smooth the growth rate to make it more understandable.

4. Using the Calculator

Tips: Enter the starting and ending values in dollars, and the number of years. All values must be positive (years must be at least 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between CAGR and average annual return?
A: CAGR accounts for compounding, while average return simply divides total return by number of years. CAGR gives a more accurate picture of growth.

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

Q3: What are the limitations of CAGR?
A: CAGR assumes a smooth growth path and doesn't account for volatility. It also doesn't consider additional investments or withdrawals during the period.

Q4: How is CAGR useful for investors?
A: It allows comparison of different investments over the same time period, regardless of their volatility.

Q5: Can I use CAGR for periods less than a year?
A: While technically possible, CAGR is designed for multi-year periods. For shorter periods, other metrics like simple return are more appropriate.