Compound annual growth rate (CAGR) is the constant annual rate that links a beginning value to an ending value over a specified number of years.
CAGR formula
CAGR = (ending value / beginning value)^(1 / years) - 1.
An investment growing from 16,000 in four years has a CAGR of about 12.47%, even if actual yearly returns varied widely.
CAGR versus average return
An arithmetic average ignores compounding and volatility. CAGR describes the smoothed start-to-finish rate but hides the path, drawdowns, and cash flows.
Limitations
Do not use CAGR alone to compare risk. It is sensitive to start and end dates and is unsuitable when external contributions or withdrawals are not adjusted.