1. Compound annual growth rate or CAGR is the average rate at which an investment moves from one value to another over a period of time.
2. If a stock appreciates from Rs 100 to Rs 121 over two years, its CAGR is 10%. The 100 became 110 after year 1 and 110 grew at 10% to become 121.
3. In reality, the stock might not have moved from 100 to 121 at a constant rate. It could have become 140 in year 1 and fallen to 121 in year 2.
4. The stocks CAGR remains 10% a year, given the begin and end values. CAGR can hide interim volatility and present a steady growth picture.
5. Investors using advertised CAGR as a benchmark before investing should find out about the risks, rather than assuming that the CAGR were an annual constant.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta).
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