CAGR (Compound Annual Growth Rate) smooths out year-to-year volatility to show the constant annual rate an investment effectively grew at.
CAGR (Compound Annual Growth Rate) answers the question: 'what single, constant annual growth rate would have taken my investment from its starting value to its ending value?' It smooths out the bumpy, uneven year-to-year returns an investment actually experiences into one clean average figure, using the formula CAGR = (Ending Value / Beginning Value)^(1/years) − 1.
CAGR is useful for comparing investments with different volatility patterns on a like-for-like basis, but it can hide the fact that the actual journey may have included sharp ups and downs along the way — two investments with the same CAGR can have very different risk profiles.
No — a simple average of yearly returns can overstate actual growth because it doesn't account for compounding and volatility. CAGR reflects the actual compounded growth rate you experienced, which is usually lower than a simple average when returns are volatile.
Yes — if your ending value is lower than your beginning value, CAGR will be negative, reflecting an overall loss over the period.
Generally yes for comparing similar investments, but always weigh CAGR against the risk taken and the volatility experienced along the way — a smoother, slightly lower CAGR may suit some goals better than a bumpier, higher one.