CAGR (Compound Annual Growth Rate)
An equivalent constant annual rate between two values—not the path actually experienced between them.
Compound annual growth rate (CAGR) is the constant annual rate that links a positive beginning value with a nonnegative ending value over a positive period. It smooths all interim variation into one rate and does not describe actual annual returns, volatility, drawdowns, or the timing of interim cash flows.
Frequently Asked Questions
Does CAGR assume the investment grew smoothly each year?
No. CAGR is an equivalent rate connecting endpoints. The actual path may include large gains, losses, and drawdowns.
Can CAGR be used when there are contributions or withdrawals?
Not reliably without adjusting the cash flows. Money-weighted return, IRR, or time-weighted return may be more appropriate depending on the purpose.
What happens when the beginning value is zero or negative?
The standard formula is not defined for a zero beginning value and may not produce a meaningful real-valued result for negative values.
Does a higher CAGR mean a better investment?
Not by itself. Volatility, drawdowns, liquidity, risk, leverage, taxes, fees, benchmark choice, and the start and end dates also matter.