The Complete Guide To what is Compound Annual Growth Rate (CAGR) Explained + Calculations

Introduction: What is CAGR?

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CAGR stands for Compound Annual Growth Rate. This metric is used to measure the growth of an investment over a specified time period, typically one year.

CAGR is calculated by taking the total asset value at the end of each year and dividing it by the initial value.

This gives us the annual rate of return, which we then calculate as a percentage. This way we can see how much our money has grown in any given period of time. For example, if your investment was worth $1,000 at the beginning and $2,000 at the end (a 100% increase), your CAGR would be 20%.

You can also calculate CAGR on a monthly basis by multiplying your monthly return percentage by 12 to find out

CAGR For Different Investments And Its Importance

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The CAGR is the Compound Annual Growth Rate which is used to indicate how much an investment has grown in a certain number of years. The CAGR for different investments are given below.

Equity Investment:

The CAGR for equity investment is about 12% which means that if you invest $1000 now, you will have $12000 after 5 years.

Stocks:

The stock market provides a capital appreciation of around 10% with the current level of inflation.

Investing in Gold:

Investment in gold also has high rate of return with the current level of inflation, at around 8%.

Investing in real estate: Sale prices are expected to increase by 4-5% every year on average, which is equivalent

CAGR Formula And How It Determines Future Growth Rates

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The CAGR (Compound Annual Growth Rate) is the annualized growth rate for an investment over a period of time. It can be calculated by dividing the total percentage return of the investment (the total increase in value) by the number of years in that period.

For example: if an investment has a total return of 5% and the period is five years, then the CAGR is 10%.

To calculate CAGR we need to use two numbers:

1. The initial value or current balance

2. The final value or current balance

A simple formula to calculate CAGR is:

CAGR = (Final Value- Initial Value)/(Number Of Years-1) * 12 Months

How to Compute Average Annual Return & CAGR Together

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The way to calculate the average annual return (AAR) and the compound annual growth rate (CAGR) is to divide AAR by CAGR.

AAR = (Ending Value – Beginning Value)/(Ending Value – Beginning Value) ^ 2

(note: the ^2 stands for squaring)

CAGR = AAR/Number of Years

Conclusion: A Brief Summary of What You Need To Know About CAGR

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