CAGR
Definition
Compound Annual Growth Rate — the annualized rate of return that smooths out volatility to show steady growth over a period.
Explanation
CAGR tells you what an investment would have returned per year if it had grown at a steady rate. It's the standard metric for comparing growth across different time periods and investments. Unlike average annual return, CAGR accounts for compounding. A stock that goes from $100 to $200 in 5 years has a CAGR of 14.87%, regardless of the path it took.
Formula
CAGR = (Ending Value / Beginning Value)^(1/years) - 1
Example
An investment grows from $10,000 to $24,000 over 5 years.
CAGR = (24,000/10,000)^(1/5) - 1 = 2.4^0.2 - 1 = 19.14%
The investment compounded at 19.14% per year — an excellent return.