CAGR Quiz

Calculate the CAGR for an investment that grows from $1000 to $1500 over 5 years.

• 3.5%

• 2%

• 10%

• 6.72%

Answer explanation

The Compound Annual Growth Rate (CAGR) is calculated as the nth root of the final value divided by the initial value, minus 1. In this case, the CAGR is approximately 6.72%, which corresponds to the correct answer choice.

What does a CAGR of 10% mean in the context of an investment?

• The investment has grown by 10% every 10 years

• The investment has grown by 10% in total

• The investment has decreased by 10% each year

• The investment has grown at an average annual rate of 10%

Answer explanation

A CAGR of 10% means the investment has grown at an average annual rate of 10%.

What is the formula for calculating CAGR in a business scenario?

• CAGR = (Ending Value / Beginning Value) * 100

• CAGR = (Ending Value - Beginning Value) * 100

• CAGR = (Ending Value - Beginning Value) / Beginning Value

• CAGR = (Ending Value / Beginning Value)^(1/n) - 1

Answer explanation

The formula for calculating CAGR in a business scenario is CAGR = (Ending Value / Beginning Value)^(1/n) - 1. This formula takes into account the growth rate over multiple periods and highlights the correct choice.

How is CAGR used in finance to compare the performance of different investments?

• By calculating the annual growth rate of an investment over a specified time period.

• By analyzing the political stability of the country where the investment is made.

• By comparing the market share of different investments.

• By calculating the total return of an investment over a specified time period.

Answer explanation

CAGR is used in finance to compare investments by calculating the annual growth rate over a specified time period.

Compare and contrast CAGR with other growth measures such as average annual growth rate and geometric mean.

• Average annual growth rate takes into account the effect of compounding, while CAGR does not

• CAGR is calculated differently from average annual growth rate, while geometric mean does not consider the effect of compounding

• CAGR considers the effect of compounding, while average annual growth rate also considers the effect of compounding

• CAGR takes into account the effect of compounding, while average annual growth rate does not. Geometric mean also considers the effect of compounding, but it is calculated differently from CAGR.

Answer explanation

CAGR considers compounding, while average annual growth rate does not. Geometric mean also considers compounding, but it's calculated differently from CAGR.

If an investment has a CAGR of 8% over 10 years, what would be the value of the investment after 10 years if the initial investment was $5000?

• $8,000.00

• $10,794.62

• $9,500.25

• $11,250.75

Answer explanation

The value of the investment after 10 years with a CAGR of 8% would be $10,794.62, which is the correct choice.

Explain how to interpret a negative CAGR in the context of an investment.

• It means the investment has remained stable over time

• It indicates that the investment has experienced a significant increase in value

• It suggests that the investment has not changed in value at all

• It indicates that the investment has experienced a decrease in value over the specified time period.

Answer explanation

A negative CAGR indicates a decrease in investment value over time.

What are the components of the CAGR formula and how are they used in the calculation?

• Ending value, beginning value, number of periods

• Starting value, interest rate, number of years

• Final value, initial value, growth rate

• Initial amount, final amount, time period

Answer explanation

The CAGR formula uses the ending value, beginning value, and number of periods to calculate the compound annual growth rate.

How can CAGR be used to evaluate the performance of a stock portfolio over a specific period of time?

• By counting the number of employees in the company

• By calculating the annual growth rate of the investment over the specified time period

• By calculating the total revenue of the company

• By measuring the temperature of the stock market

Answer explanation

CAGR evaluates stock portfolio performance by calculating the annual growth rate of the investment over a specific time period.

Discuss the limitations of using CAGR as a measure of investment growth compared to other measures like absolute return and annualized return.

• CAGR is not affected by market fluctuations

• CAGR is not widely used in the financial industry

• Absolute return and annualized return are not accurate measures

• CAGR does not account for volatility and can be skewed by extreme values, while absolute return and annualized return provide a more comprehensive view of investment growth.

Answer explanation

CAGR ignores volatility and extreme values, while absolute and annualized returns offer a more comprehensive view of investment growth.