When given asset value, we are able to use either but when given the return rates, we can only use Geometric Mean? Thanks.
I’m not sure if I understand your question completely. CAGR and Geometric Mean are the same thing.
Chuckrox8 Wrote: ------------------------------------------------------- > I’m not sure if I understand your question > completely. CAGR and Geometric Mean are the same > thing. Oh I’m asking this because their formula looks different. Anyway, let me rephrase my question. When computing the growth rate given the returns over the few years, I suppose we use Geometric Mean to calculate? When computing the growth rate given the beginning and ending value, we use CAGR to calculate? If not, how do you calculate returns using CAGR since its formula is “(Ending / Beginning) ^ (1/years) -1” ? Thanks.
revenant Wrote: ------------------------------------------------------- > > When computing the growth rate given the returns > over the few years, I suppose we use Geometric > Mean to calculate? > > When computing the growth rate given the beginning > and ending value, we use CAGR to calculate? > > If not, how do you calculate returns using CAGR > since its formula is “(Ending / Beginning) ^ > (1/years) -1” ? > > Thanks. Anyone?
these methods should result in the same figure, so i’d say that depending upon the input provided, make the choice from that.
tsx11 Wrote: ------------------------------------------------------- > these methods should result in the same figure, so > i’d say that depending upon the input provided, > make the choice from that. I can’t see that happening actually. What if a stock’s value for the last 3 years are $10, $20, then $15? We don’t just use (15-10)^1/3 -1 do we? Just trying to make things clearer. Thanks.
YR1-2 growth rate: (20-10)/10 = 100% Yr 2-3 growth rate: (15-20)/20 = -25% CAGR: (2*.75) ^ 1/2 = 1.2247 ==> 22.47% which is the same as (15-10)/10 ^ 1/2 remember that you have to look at the intervenining number of periods – which is 2 and not 3 as you have used above.
CAGR is the geometric progression ratio that provides a constant rate of return over the time period.
CAGR is point based and not depend on path, End value, Initial Value and horizon(Periods of investment) we calculate the CAGR
Eg, $100 invested in 2000 is $325 in 2020 means 6.0704% CAGR. Geometric mean would give same answer but we need Y-o-Y rates to calculate GEOMEAN
Below image is for demonstration with example (Did not format it to look good though)
$10 invested for 2 years with $15 as end value
