CAGR vs average annual return: formula and examples
Learn how to calculate compound annual growth rate, why it differs from an arithmetic average, and when neither number captures investment risk.
Calculate CAGR from beginning and ending values
CAGR = (ending value ÷ beginning value)^(1 ÷ years) − 1. A value rising from 10,000 to 14,400 over four years has CAGR (1.44)^(1/4) − 1, or about 9.54% per year. Use the CAGR calculator to check the period and values. Both starting and ending values must be positive.
Why the average of yearly returns differs
Suppose an investment rises 50% in year one and falls 20% in year two. The arithmetic average return is 15%, but 100 becomes 150 and then 120. Its two-year CAGR is √1.2 − 1, about 9.54%. Multiplication, rather than addition, determines the ending balance. See the compound interest guide for a worked compounding example.
Know what CAGR leaves out
CAGR smooths the path between two dates. It does not reveal drawdowns, volatility, contributions, withdrawals, fees or tax. If cash flows occur during the period, a simple beginning-to-end CAGR can mislead. Compare like-for-like intervals and use the percentage change calculator for a single change. Historical growth is not a forecast.