Which of the following statements are correct about the compound annual growth rate (CAGR) ?
(A) CAGR is calculated by using the final and beginning value of an investment.
(B) CAGR is compounded annual return of an investment.
(C) CAGR describes the effect of compounding.
(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 over n years is
\( \displaystyle \text{CAGR}=\left(\frac{\text{Final value}}{\text{Beginning value}}\right)^{1/n}-1 \)
So CAGR is the steady yearly rate, compounded annually, that takes the beginning value to the final value, and it puts different investments on the same yearly footing.
Checking the statements
(A) 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.
(B) CAGR is compounded annual return of an investment. — Correct. It is the steady yearly rate that gives the same final value with annual compounding.
(C) CAGR describes the effect of compounding. — Correct. It assumes that each year’s growth is reinvested.
(D) CAGR can be used to demonstrate and compare the performance of investment advisors. — Correct. It turns different results into comparable yearly rates.