Choose the correct statement about CAGR (compound annual growth rate)?

The correct answer is Option (4) → CAGR is calculated by using the final and beginning value of an investment.

Option 1: While CAGR represents an annualized return, it is specifically a geometric growth rate, not a simple "average." Calling it an "average annualized return" can be misleading as it implies an arithmetic average (see Option 2).

Option 2: This is a major trap. CAGR is not an arithmetic mean. The arithmetic mean fails to account for the volatility and the "compounding effect" over time. If an investment grows 50% one year and drops 50% the next, the arithmetic mean is 0%, but your actual CAGR is negative because you lost half of your larger balance.

Option 3: This is the opposite of the truth. CAGR is a non-linear measure precisely because its entire purpose is to account for the effects of compounding.

Option 4: It is correct because CAGR is computed from the beginning value $V_0$, the ending value $V_n$, and the number of years $n$ by the formula

$\displaystyle \text{CAGR}=\left(\frac{V_n}{V_0}\right)^{\frac{1}{n}}-1$