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CAGR smooths growth into a constant annual rate. It does not show year-to-year volatility and does not guarantee future returns.
What is CAGR?
CAGR stands for compound annual growth rate. It estimates the constant yearly rate that would take a beginning value to an ending value over a specified number of years.
CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Years) − 1
Worked example
If an investment grows from £10,000 to £15,000 over 5 years, the CAGR is the annual rate that would produce the same overall growth if that rate had been constant each year.
Frequently asked questions
Is CAGR the same as average annual return?
No. A simple average adds annual returns and divides by the number of years. CAGR accounts for compounding and reflects the smoothed annual growth rate.
Can CAGR be negative?
Yes. If the ending value is lower than the beginning value, the CAGR will be negative.
Does CAGR show volatility?
No. Two investments can have the same CAGR while having very different year-to-year movements.