What is CAGR?
Compound Annual Growth Rate — the average yearly return, including compounding. 10% CAGR doubles money in ~7 years.
CAGR — compound annual growth rate — is the constant yearly return that would turn the starting value into the ending value, including the effect of compounding. If $10,000 grows to $20,000 in seven years, the CAGR is about 10.4% per year, even if individual years were very different.
CAGR is the most useful single number for long-term growth, because it accounts for compounding and is easy to compare. Its weakness: it says nothing about the path. Two investments with the same CAGR can feel completely different if one of them halved along the way.
That is why CAGR should always be read together with risk measures such as maximum drawdown, volatility and the Sharpe ratio.
Related terms
See CAGR applied to real markets — 30 markets, decades of data — in the Research Terminal.
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