Compound Annual Growth Rate (CAGR) Definition & Example

The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.

The formula for CAGR is:

CAGR   =   ( EV / BV)^{1 / n} – 1

where:

EV = Investment’s ending value
BV = Investment’s beginning value
n   = Number of periods (months, years, etc.)

Let’s assume you invest $1,000 in Fund XYZ for five years. The year-end value of the investment is listed below for each year.

Year    Ending Value
1             $   750
2               1,000
3               3,000
4               4,000
5               5,000

We can calculate the CAGR of the investment as:

CAGR = ( 5,000 / 1,000)^1/5 – 1 = .37973 = 37.97%

TIP: If you are using a financial calculator, use the y^x button to raise ( 5,000 / 1,000) to the power of 0.20 (since 1 / 5 = 0.20 ).

[Our easy to use CAGR Calculator can help you project the CAGR needed to achieve your investment goals or measure the return on existing investments.]…