NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
A portfolio's value rises from Rs 100 lakh to Rs 120 lakh in year 1 and then falls to Rs 108 lakh in year 2, with no cash flows. What is the compounded annual growth rate (CAGR) over the two years, approximately?
The CAGR is approximately 4%. The portfolio grew from Rs 100 lakh to Rs 108 lakh over two years, a total growth factor of 1.08, and its square root is about 1.039. The simple average of 5% overstates the return, and 8% is the total, not annual.
- A4.0%Correct
- B8.0%
- C5.0%
- D10.0%
Explanation
Total growth = 108/100 = 1.08. CAGR = sqrt(1.08) - 1 = 1.0392 - 1, about 3.9%, i.e. approximately 4.0%. The arithmetic average of +20% and -10% is 5%, which overstates the return, and 8% is the total, not annualised.
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