1. What is CAGR?

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR equation:

Where:

• \( End \) — Ending value
• \( Start \) — Starting value
• \( Months \) — Time period in months

Explanation: The equation calculates the constant rate of return that would be required for an investment to grow from its initial balance to its ending balance, given the time period in months.

3. Importance of CAGR Calculation

Details: CAGR is important because it provides a smoothed annual rate that eliminates the volatility of periodic returns. Investors can compare the CAGR of different investments to evaluate which one performed better over time.

4. Using the Calculator

Tips: Enter the starting value, ending value, and time period in months. All values must be positive numbers (months must be at least 1).

5. Frequently Asked Questions (FAQ)

Q1: Why use CAGR instead of average return?
A: CAGR accounts for compounding effect over time, while average return doesn't. CAGR gives a clearer picture of investment performance.

Q2: What are typical CAGR values?
A: For stocks, long-term CAGR is typically 7-10%. Higher values indicate better performance, but may also indicate higher risk.

Q3: Can CAGR be negative?
A: Yes, if the ending value is less than the starting value, CAGR will be negative, indicating a loss over the period.

Q4: What are limitations of CAGR?
A: CAGR doesn't account for investment risk or volatility. It assumes smooth growth, which rarely happens in reality.

Q5: How does time period affect CAGR?
A: Longer time periods tend to produce more stable CAGR values as short-term fluctuations are smoothed out.