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What is CAGR?

The compound annual growth rate: the smoothed annual rate that would have produced the observed change over the period.

It is deliberately a smoothing. A fund that returned 60% then −20% has the same CAGR as one that returned 13.1% twice, and CAGR hides the difference, which makes it right for comparison and wrong for judging risk.

CAGR = (V_final / V_initial)^(1/t) − 1

Not to be confused with Absolute return

Absolute return is the total change and flatters long holdings. CAGR annualises it, which is what makes two investments over different periods comparable.

Where this is used