NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A portfolio's value is ₹100 lakh at the start of year 1, grows to ₹120 lakh at the end of year 1, and falls to ₹108 lakh at the end of year 2, with no cash flows. What is its compound annual growth rate (CAGR) over the two years?
The CAGR is about 3.92%. The portfolio grows from ₹100 lakh to ₹108 lakh over two years, a total growth factor of 1.08. Taking the square root gives roughly 1.0392, so the annual compounded return is about 3.92%, below the 5% arithmetic average.
- A4.00%Correct
- B5.00%
- C3.92%
- D4.40%
Explanation
Year 1 return is +20% and year 2 return is −10% (12/120). Growth factor = 1.20 × 0.90 = 1.08, so CAGR = √1.08 − 1 ≈ 1.0392 − 1 = 3.92%. Hence the correct value is 3.92%, not the arithmetic mean of 5%, and 4.00% is simply 8%/2.
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