CAGR Calculator
Measure annualized growth between beginning and ending value.
What is CAGR?
CAGR (Compound Annual Growth Rate) measures the average annual growth rate of an investment over a specified period. It represents the constant rate at which the investment would have grown if it had compounded at the same rate each year. CAGR smooths out volatility, making it easier to compare investments.
CAGR Formula
CAGR = (Ending Value / Beginning Value)^(1/n) - 1, where n = number of years. For example, an investment growing from $10,000 to $19,500 over 5 years: CAGR = (19,500/10,000)^(1/5) - 1 = 14.3%. This means the investment grew at an average of 14.3% per year.
Why CAGR Matters
- •CAGR is essential because: (1) It allows comparison of investments with different time periods, (2) It accounts for compounding (unlike simple average return), (3) It smooths volatility for easier analysis, (4) It's widely used by fund managers and analysts for performance reporting. However, it doesn't show the actual year-by-year performance.
CAGR vs Average Annual Return
CAGR uses geometric mean (accounts for compounding); average annual return uses arithmetic mean (simple average). Example: Investment goes $100 -> $200 -> $100 over 2 years. Average return = (100% + -50%) / 2 = 25%. CAGR = (100/100)^(1/2) - 1 = 0%. CAGR is correct—the investment ended where it started.
Limitations of CAGR
CAGR hides volatility (doesn't show risk). It assumes steady growth (rarely true in reality). It's sensitive to the start and end points (choosing different periods gives different CAGRs). It doesn't account for additional investments or withdrawals during the period. Always use CAGR alongside other metrics like standard deviation.
Comparison Analysis
CAGR vs Average Annual Return vs Absolute Return
| Criteria | CAGR | Average Annual Return | Absolute Return |
|---|---|---|---|
| Calculation | Geometric mean (compounded) | Arithmetic mean (simple) | Total percentage change |
| Accounts for Compounding | Yes | No | No |
| $100->$200->$100 example | 0% | 25% | 0% |
| Best For | Comparing investments over time | Quick estimate | Total performance snapshot |
| Shows Volatility | No | No | No |
Content Verification
Expert Review
Reviewed by David Park, Chartered Financial Analyst (CFA), Investment Performance Analyst
Authoritative Sources
Based on CFA Institute standards, SEC guidelines, and established financial mathematics
Last Reviewed
Content verified May 2026 against current investment performance measurement standards