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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape

An investment of Rs 1,00,000 grows to Rs 1,44,000 in exactly two years. A second investment of Rs 1,00,000 grows to Rs 1,20,000 in year one and then to Rs 1,44,000 at the end of year two. Which statement about their annualised compound returns (CAGR) is correct?

Both investments have a CAGR of 20%. CAGR depends only on the starting value, ending value and time period: the square root of 1.44 is 1.2, so 20% a year. The interim value after year one does not change it. Simple averaging would wrongly give 22%.

  1. AThe first has a CAGR of 22% and the second 20%
  2. BThe second has a higher CAGR because it earned 20% in the first year
  3. CBoth have a CAGR of 20%Correct
  4. DThe first has a CAGR of 44% and the second 22%

Explanation

Both start at Rs 1,00,000 and end at Rs 1,44,000 after two years. CAGR = (1.44)^(1/2) - 1 = 1.2 - 1 = 20%. The path of intermediate values does not alter CAGR. Dividing 44% by 2 gives a wrong simple average of 22%.

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