Which of the following statements are correct about the Compound Annual Growth Rate (CAGR)?
(A) It can be used to compare historical returns on different investment portfolios.
(B) It helps smooth returns when growth rates are expected to be volatile and inconsistent.
(C) It is unable to track the performance of various business measures of one or multiple companies alongside one another.
(D) It can be used to calculate the average growth of a single investment.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
The CAGR is the constant yearly rate at which a quantity would grow from its beginning value (BV) to its ending value (EV) in n years:
\( \displaystyle \text{CAGR} = \left(\frac{EV}{BV}\right)^{\frac{1}{n}} - 1 \)
(A) It can be used to compare historical returns on different investment portfolios. — Correct. Being a yearly rate, it puts portfolios held for different periods on a common footing.
(B) It helps smooth returns when growth rates are expected to be volatile and inconsistent. — Correct. It replaces the uneven year-by-year rates by one smoothed rate.
(C) It is unable to track the performance of various business measures of one or multiple companies alongside one another. — Incorrect. CAGR is used for exactly this: the growth of sales, profit or market share of one or several companies can be compared side by side.
(D) It can be used to calculate the average growth of a single investment. — Correct. It gives the average yearly growth of an investment from its beginning to its ending value.
CBSE Applied Mathematics (Class XII):
Compound Annual Growth Rate
