What is CAGR? Definition, Formula, and Example
CAGR (compound annual growth rate) is the constant annual rate at which an investment would have grown to go from its starting value to its ending value over a given period, smoothing out year-to-year volatility.
What is CAGR?
CAGR — compound annual growth rate — is the single constant annual rate that takes an investment from its beginning value to its ending value over a specified number of years, assuming all gains are reinvested. It is not the average of annual returns; it is the geometric growth rate implied by the start and end points. If a portfolio grows from $10,000 to $25,000 over ten years, CAGR answers the question: "What fixed yearly return, compounded, would have produced this exact result?" The answer in that case is 9.6% per year — not the 15% you'd get from naively dividing 150% total return by ten.
How CAGR is Calculated
The formula is:
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) − 1
Only three inputs matter: the starting value, the ending value, and the elapsed time. Everything that happened in between — the drawdowns, the rallies, the flat years — is invisible to the calculation. That is both CAGR's strength (simplicity, comparability) and its weakness (it hides risk).
For fractional periods, use the exact number of years including decimals. An investment held for 2.5 years uses an exponent of 1/2.5 = 0.4.
Worked Example: Apple Stock
Take AAPL. At the start of 2019, Apple traded near a split-adjusted $39. By the end of 2024, it closed near $250. That is a six-year window.
CAGR = (250 / 39)^(1/6) − 1 = (6.41)^(0.1667) − 1 ≈ 0.362, or 36.2% per year.
Now compare that to the arithmetic mean of Apple's annual returns over the same stretch — roughly 39% — and you see the divergence that always appears in volatile assets: the arithmetic mean overstates the compounded result. The gap between the two grows with volatility, a phenomenon quantified as volatility drag. An investor who quotes the average annual return instead of CAGR is overstating what a buy-and-hold position actually delivered.
When Traders and Investors Use CAGR
CAGR is the standard yardstick for comparing growth across assets, funds, or strategies over the same period. Common applications:
- Fund comparison. Two mutual funds with identical total returns but different paths have identical CAGRs — which is exactly why CAGR must be paired with a risk metric like the Sharpe ratio or maximum drawdown before drawing conclusions.
- Revenue and earnings analysis. Analysts quote "5-year revenue CAGR" to summarize a company's growth trajectory. A firm growing revenue at a 20% CAGR doubles sales roughly every 3.8 years.
- Backtest reporting. Strategy performance over a multi-year backtest is conventionally reported as CAGR alongside drawdown and win rate.
- Goal setting. The rule of 72 inverts CAGR: dividing 72 by a CAGR gives the approximate doubling time.
Limitations and Common Misconceptions
CAGR tells you nothing about the path. A strategy that returned 15% CAGR with a 60% drawdown in year three looks identical to one that ground out 15% every year. It is a summary statistic, not a risk measure, and it must never be quoted alone.
Second, CAGR is acutely sensitive to the chosen start and end dates. Measuring from a market bottom to a market top inflates it; cherry-picking endpoints is the oldest trick in fund marketing. Always check whether the measurement window is representative.
Third, CAGR assumes reinvestment and ignores cash flows. If you added or withdrew money mid-period, CAGR misstates your personal return — use the internal rate of return (IRR) or time-weighted return instead.
Finally, a common error is confusing CAGR with the arithmetic average return. For any volatile series, arithmetic mean > CAGR, and the difference widens with volatility. Quoting the mean when you mean the compound rate is either a mistake or a sales tactic.