Glossary entry for Compound Annual Growth Rate (CAGR):
Compound Annual Growth Rate (CAGR)
Short definition: The compound annual growth rate (CAGR) is a financial metric that measures the average annual growth rate of an investment over a specified period.
Explanation: CAGR is calculated by taking the nth root of the total percentage growth, where n is the number of years in the period being considered. It is a useful tool for comparing the performance of different investments over time, as it smooths out the effects of volatility and provides a single, representative growth rate.
Example: If an investment of $10,000 grows to $15,000 over five years, the CAGR would be approximately 8.45%. This means that the investment grew at an average annual rate of 8.45% over the five-year period.