What is a CAGR & how does it work?

The CAGR would calculate the rate of return based on the beginning and ending balances over the five years, and would essentially count the deposited funds as part of the annual growth rate, which would be inaccurate. Besides the smoothed rate of growth, the CAGR has other limitations.

What is the difference between CAGR and arithmetic mean?

An average annual return (or arithmetic mean) ignores the effects of compounding and can overestimate growth. CAGR, on the other hand, represents a consistent rate at which the investment would have grown. CAGR will always be equal to or less than the arithmetic mean. Are CAGR and IRR the Same?

What are the use cases of compound annual growth rate (CAGR)?

One of the more practical use cases of the compound annual growth rate (CAGR), aside from understanding historical growth, pertains to forecasting. Historical CAGR Analysis → Once the historical CAGR has been computed, the figure can be referenced to establish the operating assumptions that drive a forecast model.

Is CAGR a'smoothed' value?

CAGR is a "smoothed" value, meaning it doesn't show the history of highs and lows an investment has seen. Growth is assumed to be constant throughout the given timeline, even though that's not necessarily the case. CAGR can't predict how an investment will perform in the future.