compound annual growth rate
- compound annual growth rate
Annual return calculated based on each year's previous balances where each previous balance includes both the original principal and all interest accrued from prior years. Best defined by example. Bloomberg Financial Dictionary
If you invest $100 today and make 5% in the first year and reinvest ($105) and make 8% in the second year, the compound annual growth rate is 6.489%. The calculation is $100x1.05x1.08=$113.4 which is what you end up with at the end of year two. The average return is [square root(113.4/100) -1]= 0.06489 or 6.489%. Bloomberg Financial Dictionary
Note 1. If we had three compounding periods we would take the cubic root (power of 1/3). Bloomberg Financial Dictionary
Note 2. If we had invested at exactly 6.489 in both periods, we get $100x1.06489x1.06489=$113.4. Bloomberg Financial Dictionary
Note 3. The example is directed to a return - but CAGR could be applied to earnings growth, GDP growth, etc. Bloomberg Financial Dictionary
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compound annual growth rate UK US noun [C] (ABBREVIATION CAGR)
► ECONOMICS, FINANCE
Financial and business terms.
2012.
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compound annual return — See: compound annual growth rate … Financial and business terms
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