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CAGR Formula

 

CAGR formula is used to calculate 'compound annual growth rate':

 

CAGR = (Value at the end / Value at the beginning) ^ (1 / Years) - 1

* Can be multiplied by 100%.


Where:

  • Value at the end is a portfolio’s (or single investment’s) market value at the end of the calculating period including capital gain, dividends and interest.
  • Value at the beginning is a portfolio’s (or single investment’s) value at the beginning of the period.
  • Years is a duration of investment period that is measured in years.

 

A simple example of CAGR calculation:


An investor has invested $10k in the beginning of his investing. Then he did not add any funds to the portfolio or did not take any out, just switched some investments in the portfolio from time to time. He was extremely lucky investor, and after 7 years the value of his portfolio was equal to $100k.


Let’s calculate CAGR: (100k/10k)^(1/7)-1 = 10k^0.14285….-1=1.3894…-1 = 0.3894…*100% = 38.9%

 

This was a very simple example. However, in reality investors always add some new funds to the portfolio and take some out, so in such cases this formula cannot be used. However, rate of return can be calculated using IRR which is almost the same as CAGR but the formula of IRR allows calculating additional inflows and outflows during the measurement period.

 






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