By: La Papillion Today I learnt much about CAGR. No, it's not a new brand of cigar. CAGR stands for compound annual growth rate. It's a nifty mathematical formula to calculate the rate at which an investment grows linearly in a given period. It all springs from the basic future value/present value equation: Future value = Present value x (1 + i)^(t) where i - interest rate compounded per per year where t - time in years Appropriate adjustment can be made if the compounding period is less than a year. Just change the appropriate figure for the time. I saw CAGR all the time in brokerage report, yet I do not understand what it is until I was forced to come to terms with it while analysing some presentation materials for china milk. It helps that prior to that, I was reading intensively on a lot of books that give calculates the growth rate for their investment using this method (though they might not call it by the same name). A good example should be able to illustrate the finer points of the formula: Let's say that in 1st Jan 2005, I started my investment portfolio with $10,000 In 1st Jan 2006, I made a loss, so my portfolio drops to $8000 In 1st Jan 2007, I recouped my loss somewhat and my portfolio stands at $9500 In 1st Jan 2008, my portfolio ends at $12,000 To calculate my CAGR, I just plug it into the formula: Present value = 10,000 Future value = 12,000 time period = 3 years i or CAGR = 6.27% compounded annually When CAGR is used, one must be careful of the assumptions behind the formula: Read more...