NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
An investment of Rs 1,00,000 grows to Rs 1,21,000 in exactly 2 years with no interim cash flows. What is the compounded annual growth rate (CAGR)?
The CAGR is 10%. The total growth factor over two years is 1.21, and its square root is 1.10, meaning 10% each year. Dividing the 21% total return by two gives 10.5%, which wrongly ignores compounding.
- A10.5%
- B11%
- C10%Correct
- D21%
Explanation
CAGR = (1,21,000/1,00,000)^(1/2) - 1 = 1.21^0.5 - 1 = 1.10 - 1 = 10%. Check: 1,00,000 x 1.1 x 1.1 = 1,21,000. 10.5% is the simple average of 21%, and 21% is total return, not annual.
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