NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A portfolio earned 10% in year 1 and 20% in year 2. What is its compound annual growth rate (CAGR) over the two years, approximately?
The CAGR is approximately 14.89%. The two-year growth factor is 1.10 x 1.20 = 1.32, and its square root is about 1.1489. The simple average of 15% overstates the return because it ignores compounding.
- A15.00%
- B14.89%Correct
- C16.50%
- D15.50%
Explanation
Growth factor = 1.10 x 1.20 = 1.32. CAGR = sqrt(1.32) - 1 = 1.1489 - 1 = 14.89%. The 15% option is the arithmetic average, which ignores compounding. Check: 1.1489 squared = 1.32.
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