NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A portfolio earned returns of 20% in year 1 and -10% in year 2. What is the approximate compounded annual growth rate (CAGR) over the two years?
The CAGR is about 3.9%. Rs 100 grows to Rs 120 and then falls to Rs 108, so the two-year growth factor is 1.08. Its square root is roughly 1.039. The arithmetic average of 5% overstates the true compounded return.
- A5.0%
- B10.0%
- C3.9%Correct
- D8.0%
Explanation
Growth factor = 1.20 x 0.90 = 1.08. CAGR = sqrt(1.08) - 1 = 1.0392 - 1, about 3.9%. The 5% figure is the arithmetic mean, which overstates the compounded return when returns vary.
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