CAGR

CAGR is the single annual rate that gets you from a starting value to an ending value.

It's the cleanest way to compare long-term returns because it compounds.

The formula

$$\text{CAGR} = \left(\frac{V_{end}}{V_{start}}\right)^{\frac{1}{years}} - 1$$

Example (why it's different from "average")

Start at 100 and end at 121 over 2 years:

$$\text{CAGR} = (121/100)^{1/2} - 1 = 10\%$$

If the path was +20% in year 1 and 0% in year 2, the arithmetic average is 10%. But CAGR = (120/100)^(1/2) - 1 = 9.54% -- slightly lower because it respects compounding. It only cares about start and end, not the wiggles in between.

What CAGR ignores

• Volatility
• Drawdowns
• The path you took to get there

That's why we pair it with max drawdown and ratios like Calmar.