Compound Annual Growth Rate (CAGR)
The smoothed annual rate that gets you from start to end value.
What is Compound Annual Growth Rate (CAGR)?
The geometric mean return. Always lower than the arithmetic average when returns are volatile, and it is the honest number - volatility drag is real money.
Compound Annual Growth Rate (CAGR): a worked example
+50% then -50% averages 0% arithmetically but is a -13.4% CAGR: $100 ends at $75.
More terms in Portfolio Management
Asset Allocation
How a portfolio is split across stocks, bonds, cash, and alternatives.
Rebalancing
Periodically restoring the portfolio to its target weights.
Dollar-Cost Averaging
Investing a fixed amount on a fixed schedule regardless of price.
Modern Portfolio Theory (MPT)
Optimize the portfolio as a whole, not security by security.
Efficient Frontier
The set of portfolios with the best return for each level of risk.
Capital Asset Pricing Model (CAPM)
Expected return = risk-free rate + beta x market risk premium.
Efficient Market Hypothesis
Prices already reflect available information.
Total Return
Price change plus income, as a single return figure.