Which of the following statements are correct about the compound annual growth rate (CAGR) ?
A. CAGR is a compounded annual return of an investment.
B. CAGR is calculated by using the final and beginning value of an investment.
C. CAGR can be used to calculate and communicate the average growth of a single investment.
D. CAGR can be used to demonstrate and compare the performance of investment advisors.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → A, B, C, and D
The compound annual growth rate of an investment over n years is
\( \displaystyle \text{CAGR}=\left(\frac{\text{Final value}}{\text{Beginning value}}\right)^{1/n}-1 \)
So CAGR is one constant yearly (compounded) rate, worked out from only the beginning value, the final value and the number of years.
Checking the statements
(A) CAGR is a compounded annual return of an investment. — Correct. It is the constant yearly rate at which the investment would have grown if compounded every year.
(B) CAGR is calculated by using the final and beginning value of an investment. — Correct. The formula uses only these two values and the number of years.
(C) CAGR can be used to calculate and communicate the average growth of a single investment. — Correct. It expresses the growth of one investment as a single average yearly rate.
(D) CAGR can be used to demonstrate and compare the performance of investment advisors. — Correct. Being a common yearly rate, it lets the results of different advisors be compared.