A measure of an average yearly growth of an investment over a certain time period when returns are reinvested is
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Compound annual growth rate
The compound annual growth rate (CAGR) is the constant yearly rate at which an investment would grow from its beginning value to its ending value if the returns were reinvested at the end of each year:
\( \displaystyle \text{CAGR} = \left(\frac{\text{Ending value}}{\text{Beginning value}}\right)^{1/n} - 1 \)
where n is the number of years. The annual average growth rate, by contrast, is the simple arithmetic mean of the yearly growth rates and ignores compounding.