CAGR (Compound annual growth rate)

Calculation and mechanics

CAGR is calculated from the starting value, the ending value and the length of the period. The ending value is divided by the starting value and the n-th root is taken, where n is the number of years. If capital grows from 100,000 to 133,100 in three years, the CAGR is 10% per year. An even return of 10% would have led to the same ending value, because 100,000 x 1.1 x 1.1 x 1.1 = 133,100.

CAGR says nothing about how evenly the return was earned. If capital rises 30% in one year and falls 10% in the next, the CAGR over both years is about 8.2%. An even development of 8.2% per year gives the same CAGR.

Classic CAGR does not account for deposits and withdrawals made along the way. A deposit raises the ending value although no investment return was earned. Accounts with capital movements therefore need a method that treats these payments separately.

CAGR = (ending value / starting value)^(1 / years) - 1

Distinction

The simple average return adds the annual returns and divides by the number of years. In the example with +30% and -10% that gives 10%, while the CAGR is about 8.2%. The difference comes from linking the returns geometrically, that is from compounding. When the annual returns fluctuate, the geometric average return lies below the arithmetic average, only with identical annual returns are both the same.

The Max drawdown and the Sharpe ratio give additional information about the path within the period. The Calmar ratio relates CAGR to the max drawdown.

In Foliograph

The CAGR (realized) in the Key Metrics panel under Risk is not a classic CAGR from a complete starting and ending value but a journal-based approximation.

Foliograph relates the realized profit of the trades closed in the period to the invested capital and annualizes the result. The duration is the time between the first and the last closed trade. It therefore does not necessarily match the whole selected period. Dividends, interest, fees and changes in the value of open positions are not part of the realized profit.

As the start capital Foliograph uses the account value closest to the start of the period. It comes from an imported IBKR statement (CSV or Flex) or from an account value Foliograph stored from TWS as it runs.

If there is a gap between that date and the start of the analysis, Foliograph reconstructs the start capital from the realized results, dividends, interest, fees, deposits and withdrawals in between. Without a historical account value Foliograph backs the start capital out of the current account value. The calculation is most accurate when an account value from an IBKR statement exists for the start of the period.

Deposits and withdrawals within the period count toward the invested capital in proportion to how long the money was in the account. The weighting follows the principle of the Modified Dietz method. A deposit shortly before the end of the period therefore enters the capital base with a small share only, a deposit at the start almost fully. This prevents later inflows from artificially raising the annualized return.

Without an available account value or a positive invested capital Foliograph shows no CAGR.

More in the guide: Trading metrics: win rate, profit factor and drawdown · Try for free

Related terms

Calmar ratio (Drawdown ratio)
Max drawdown (Maximum drawdown, MDD, time in drawdown)
Realized P&L and total return (Realized profit, total return)
Sharpe ratio (Reward-to-variability ratio)

All terms in the glossary

All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.