Measuring performance
CAGR
Also called Compound annual growth rate, Annualised return or Geometric mean
The steady yearly rate that would have turned your starting value into your ending value.
How it works
CAGR smooths a bumpy path into one number. It answers "what constant annual return would have produced this result", which is the right way to compare investments held for different lengths of time.
It is always less than or equal to the simple average of the yearly returns, and the gap grows with volatility.
Where it misleads people
CAGR describes only the two endpoints. A holding that fell 60% in the middle and recovered has the same CAGR as one that rose steadily, and they were not the same investment to live through.
Formula
CAGR = (ending value ÷ starting value)^(1 ÷ years) − 1Worked example
$10,000 growing to $18,000 over 7 years: (1.8)^(1/7) − 1 ≈ 8.7% a year.
Related terms
- ReturnWhat an investment gained or lost over a period, as a percentage of what it was worth at the start.
- Volatility dragThe way volatility reduces compounded returns below the simple average of the yearly returns.
- Maximum drawdownThe largest peak-to-trough fall a portfolio or strategy suffered over the period examined.
- Time-weighted returnA return that strips out the effect of money you added or withdrew, so it measures the investments alone.
Mentioned in
More in Measuring performance
- Benchmark
- Contribution to return
- Behaviour gap
- Equity risk premium
- Backtest
- Information ratio
- Look-ahead bias
- Yield on cost
All 29 Measuring performance terms · The full glossary, 433 terms
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