What is CAGR, and how is the current month handled?

Q: What is CAGR, and how is the current month handled?

CAGR stands for Compound Annual Growth Rate. It answers a simple question: if a strategy grew at a perfectly steady rate every year, what would that annual rate be? It is the standard way to compare returns across strategies with different track record lengths, because raw cumulative return is misleading - a strategy with 20 years of history and a strategy with 3 years of history need a common yardstick. The formula compounds the total return over the full period and then scales it to one year: CAGR = (Ending Value / Starting Value) ^ (1 / Years) − 1 A strategy that turned $10,000 into $18,000 over 5 years has a CAGR of about 12.5%, regardless of how bumpy or smooth the ride was along the way. What CAGR doesn't tell you CAGR says nothing about risk, volatility, or drawdowns. Two strategies can share the same CAGR while one lost 50% and recovered while the other barely dipped. For a fuller picture, pair it with Max Drawdown, Ulcer Index, and Sortino ratio.

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Accepted Answer

CAGR stands for Compound Annual Growth Rate. It answers a simple question: if a strategy grew at a perfectly steady rate every year, what would that annual rate be? It is the standard way to compare returns across strategies with different track record lengths, because raw cumulative return is misleading - a strategy with 20 years of history and a strategy with 3 years of history need a common yardstick.

The formula compounds the total return over the full period and then scales it to one year:

CAGR = (Ending Value / Starting Value) ^ (1 / Years) − 1

A strategy that turned $10,000 into $18,000 over 5 years has a CAGR of about 12.5%, regardless of how bumpy or smooth the ride was along the way.

What CAGR doesn't tell you

CAGR says nothing about risk, volatility, or drawdowns. Two strategies can share the same CAGR while one lost 50% and recovered while the other barely dipped. For a fuller picture, pair it with Max Drawdown, Ulcer Index, and Sortino ratio.