CAGR (compound annual growth rate)
The constant yearly growth rate that leads from a starting value to an ending value.
The average that tells the truth
The compound annual growth rate is the constant rate that, applied every year, leads from the starting value to the ending value. It is a geometric mean: unlike the simple average of yearly returns, it accounts for compounding and losses.
Illustrative path from 100 to 180
TCAM = (valeur finale / valeur initiale)1 / n - 1
- n
- number of years.
Worked example
+50% then -50%
- €100 becomes €150 in year one, then €75 in year two.
- Simple average: (50 - 50) / 2 = 0%.
- CAGR: (75 / 100)^(1/2) - 1 = -13.4% a year.
The simple average shows 0% while the saver lost a quarter of their capital.
Questions and answers
Does an index’s CAGR include dividends?
Only if you start from the total-return index. On the price index it understates the shareholder’s return.
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