Compounded Annual Growth Rate (CAGR)
The Compound Annual Growth Rate (CAGR) indicates the average annual return an investment generates over a period (e.g., 5+ years), assuming profits are reinvested. It smooths out performance to show consistent yearly growth. The formula is: CAGR = [(Ending Value / Beginning Value)^(1/N)] - 1, where N is the number of years. For example, if an investment grows from 1,000 to 2,000 in 5 years, CAGR = [(2000/1000)^(1/5)] - 1 = 14.87%. It’s a key metric for evaluating long-term investment performance.
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