CAGR measures the annualized average growth rate of an investment over a specified period, assuming profits are reinvested. It smooths out volatility to show consistent growth.

Notes

Formula

((Ending Value / Beginning Value)^(1 / Number of Years)) - 1

Story

CAGR is a key financial metric that calculates the constant rate at which an investment would have grown if it had compounded over the investment period, assuming that the profits were reinvested during the term. It’s used to compare the performance of different investments over time, smoothing out the effects of market volatility. CAGR is not the actual growth rate, but rather a hypothetical rate that represents a smoothed average.

TakeAways

• 📌 CAGR calculates the average annual growth rate of an investment over a specific period, assuming reinvestment of profits.
  • Measures consistent growth, smoothing out volatility.
  • Used to compare different investments.
• 💡 CAGR is a hypothetical rate, not the actual growth experienced. It assumes consistent growth and reinvestment of profits.
• 🔍 CAGR is expressed as a percentage. Requires beginning and ending values, and the investment period.

Process

1. 🧮 Calculate: Use the CAGR formula: ((Ending Value / Beginning Value)^(1 / Number of Years)) - 1
2. 📈 Interpret: The resulting percentage represents the annualized average growth rate.
3. 📅 Compare: Use CAGR to compare the performance of different investments over similar time periods.

Thoughts

• 📈 Consistent Growth: CAGR helps visualize consistent growth despite market fluctuations.
• ⏳ Long-Term Perspective: CAGR is most useful for evaluating long-term investments.
• 🤔 Limitations: CAGR doesn’t reflect actual volatility or the sequence of returns.
• ❓ Further Analysis: CAGR should be used in conjunction with other metrics for a comprehensive investment analysis.

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