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CAGR (Compound Annual Growth Rate)
Definition
The average annual growth rate of an investment over a multi-year period.
Explanation
CAGR = ((Ending ÷ Beginning)^(1÷Years) − 1) × 100. CAGR smooths volatility and gives a single annualized rate, making it the best metric for comparing performance across different time periods or assets.
Unlike simple ROI, CAGR accounts for compounding and time. Real investments have ups and downs, but CAGR provides a useful average.
Example
$10,000 grows to $18,000 over 5 years. ROI = 80%. CAGR = ((18,000 ÷ 10,000)^(1÷5) − 1) × 100 = 12.5% per year.