NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A PMS portfolio's value grows from ₹1,00,000 to ₹1,21,000 over two years, with no inflows or outflows. What is the compound annual growth rate (CAGR)?
The CAGR is 10%. The portfolio grew by a factor of 1.21 over two years, and the square root of 1.21 is 1.10, so the annual compounded rate is 10%. Dividing the 21% total gain by two would wrongly give 10.5%.
- A10%Correct
- B10.5%
- C11%
- D21%
Explanation
CAGR satisfies (1+r)^2 = 1,21,000/1,00,000 = 1.21, so 1+r = 1.1 and r = 10%. The 10.5% option is the simple average of the total return (21%/2). Check: 1,00,000 × 1.1 × 1.1 = 1,21,000.
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