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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Investment

An investment of Rs 1,00,000 grows to Rs 1,21,000 at the end of two years with no interim cash flows. What is the compound annual growth rate (CAGR)?

The CAGR is 10%. The value grows by a factor of 1.21 over two years, and the square root of 1.21 is 1.10, so the annual compounded growth is 10%. Simply halving the 21% total gain to get 10.5% ignores compounding.

  1. A10.50%
  2. B11.00%
  3. C9.50%
  4. D10.00%Correct

Explanation

CAGR = (1,21,000/1,00,000)^(1/2) - 1 = sqrt(1.21) - 1 = 1.10 - 1 = 10%. Check: 1,00,000 x 1.10 x 1.10 = 1,21,000. Dividing the 21% total return by 2 gives 10.5%, which is the arithmetic average and ignores compounding.

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