The compound annual growth rate (CAGR) is a measure of the rate at which an investment or asset has grown over a period of time. It represents the average annual growth rate over a specific time period, usually measured in years.
To calculate the compound annual growth rate CAGR, you need to know the starting value of the investment or asset, the ending value, and the number of years over which the growth occurred. The formula for calculating CAGR is:
CAGR = (ending value / starting value)^(1 / number of years) – 1
For example, if you had an investment that was worth $100 at the start of the year and it was worth $150 at the end of the year, the CAGR would be:
CAGR = ($150 / $100)^(1 / 1) – 1 = 0.50, or 50%
This means that the investment grew by an average of 50% per year over the course of the year.
CAGR is often used to compare the performance of different investments or to compare an investment’s performance to a benchmark, such as the overall stock market. It’s important to note that CAGR is a theoretical rate of return and does not take into account factors such as inflation or taxes.