CAGR or Compound Annual Growth Rate is the return an investment provides over a period, expressed as a time weighted annual percentage.

CAGR formula

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CAGR Example

An investor purchases a stock on 1/1/2010 for $20. The investor sells it on 1/1/2015 for $35 generating a $15 profit. During the 5 year period the investor received total of $2 in dividends. The investor’s total return over 5 years is $17 or 85% (17/20) of the initial investment.

The annual return required to generate 85% over 5 years is given by (37/20)^(1/5)-1 = 13.1% annual return