An investment of Rs. 80,000 grew to Rs. 1,06,480 in 3 years. By how many percentage points (approximately) does its average annual growth rate (total growth divided by the number of years) exceed its compound annual growth rate (CAGR)? (Given \((1.331)^{1/3} = 1.1\))
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 1.03
The ratio of the ending value to the starting value is
\( \displaystyle \frac{106480}{80000} = 1.331 \)
The CAGR is
\( \text{CAGR} = \left[(1.331)^{1/3} - 1\right] \times 100 = (1.1 - 1) \times 100 = 10\% \)
The total growth is 33.1%, so the average annual growth rate is
\( \displaystyle \frac{33.1}{3} = 11.03\% \)
The difference is
\( 11.03 - 10 = 1.03 \)
The average annual growth rate ignores compounding, so it overstates the yearly growth.