What does the Compound Annual Growth Rate (CAGR) measure?

The Compound Annual Growth Rate (CAGR) is a vital financial metric used to measure the mean annual growth rate of an investment over a specified period of time, assuming that the profits are reinvested at the end of each period. It provides a smooth rate of return that represents what an investment would grow if it grew at the same rate every year, making it particularly useful for comparing the historical performance of various investments or tracking growth over multiple years.

This makes CAGR an important figure for investors, as it strips out the effects of volatility and provides a clearer picture of the investment’s growth trajectory. It is calculated using the formula:

[ \text{CAGR} = \left( \frac{\text{Ending value}}{\text{Beginning value}} \right)^{\frac{1}{n}} - 1 ]

where n is the number of years.

In contrast, the other options pertain to different financial metrics: total revenue refers to the overall income earned by a company; total market share is a measure of a product's sales as a percentage of the total sales in its market; and the expense ratio relates to the costs associated with managing an investment fund, which are significant but not indicative of growth rates. Therefore, the