NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A portfolio's investment of Rs 10,00,000 grows to Rs 12,10,000 after exactly two years with no interim cash flows. What is its 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 compounded annual return is 10 percent. Simple averaging would wrongly give 10.5 percent.
- A10.5%
- B10%Correct
- C21%
- D9.5%
Explanation
Growth factor = 12,10,000/10,00,000 = 1.21. Two-year CAGR = sqrt(1.21) - 1 = 1.10 - 1 = 10%. Check: 1.10 squared = 1.21. The 10.5% option is the simple average of 21% total over two years, which ignores compounding.
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