What it is
CAGR is the steady yearly growth rate that would turn a starting value into an ending value over a period. Real returns jump around; CAGR smooths them into one number you can compare.
CAGR = (ending value / starting value)^(1 / years) - 1
Example
$10,000 grows to $25,000 in 8 years: (25,000 / 10,000)(1/8) - 1 = 2.50.125 - 1 = 12.1% a year.
CAGR versus average return
A portfolio that gains 50% one year and loses 50% the next has an average return of 0%, but you end with $75 for every $100: a CAGR of about -13%. Volatility pulls CAGR below the average return. This gap is the same effect that hurts leveraged funds. See Volatility decay.
Using it well
- Compare CAGRs only over the same dates.
- Pair it with risk: Maximum drawdown and the Calmar ratio.
- Include dividends for stocks and funds; price-only CAGR understates returns.
See also
- Compound interest How compound interest and compound returns work, the formula, the rule of 72, and why starting early matters more than investing large amounts later.
- Calmar ratio The Calmar ratio compares annual return with the worst drawdown. How to calculate it, what a good value is, and why drawdown-based risk matters.
- Volatility decay What volatility decay (beta slippage) is, why leveraged ETFs lose value in choppy markets, a worked example, and the formula that estimates the drag.
Pages that link here: How to read a backtest, What is backtesting?
Last updated September 30, 2026. Education only, not investment advice.