CAGR

What is CAGR?

CAGR, the compound annual growth rate, is the single constant yearly rate at which an account would have had to grow to get from its starting value to its ending value over the measured period. It is the standard way to state an annualized return, and it differs from a simple total return in that it accounts for compounding: a strategy that turns 100 into 200 over five years has a total return of 100 percent but a CAGR of roughly 14.9 percent, not 20 percent.

CAGR exists because raw total returns are not comparable across different track-record lengths. Annualizing puts a three-year backtest and a ten-year backtest on the same footing, and because it is geometric rather than arithmetic, it correctly reflects the path dependence of compounding: large losses hurt more than the same-sized gains help, and CAGR captures that automatically.

Traders care because CAGR is the headline growth number in nearly every backtest report and fund factsheet. Its equally important weakness is that it says nothing about risk. Two systems with identical CAGR can have wildly different volatility and drawdown profiles, which is why CAGR is almost always paired with a risk-adjusted measure such as the Sharpe ratio or the Calmar ratio before any comparison is taken seriously.

How it's calculated

CAGR is the geometric annualized return between two equity values.

Equivalently, CAGR is the geometric mean of the periodic growth factors, annualized.

For periods under one year, annualizing extrapolates a short sample and can grossly overstate what is sustainable; many practitioners simply report the unannualized return instead.

How traders use it

• Headline performance: CAGR is the default growth figure for comparing strategies, funds, and buy-and-hold benchmarks over different time spans on a common annual basis.
• Risk-adjusted ratios: CAGR is the numerator of the Calmar and MAR ratios and feeds most drawdown-based performance measures, so an inflated CAGR propagates into every ratio built on it.
• Compounding projections: given a CAGR estimate, traders project account growth over multi-year horizons, though such projections inherit all the fragility of assuming the past rate persists.
• Sanity checks: an out-of-sample or walk-forward CAGR far below the in-sample figure is a classic overfitting symptom worth investigating before deployment.
• Limitations: CAGR is start-date and end-date sensitive, ignores volatility and drawdowns entirely, and over short windows is dominated by luck, so it should never be the sole selection criterion.

CAGR vs. related concepts