NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
An investment of Rs 1,00,000 grows to Rs 1,44,000 over exactly two years with no interim cash flows. What is the compounded annual growth rate (CAGR)?
The CAGR is 20 percent. The value multiplies by 1.44 over two years, and the square root of 1.44 is 1.2, so the annual compounded growth is 20%. Simply halving the 44% total return to 22% ignores compounding and is wrong.
- A22%
- B20%Correct
- C18%
- D44%
Explanation
CAGR = (1,44,000/1,00,000)^(1/2) - 1 = sqrt(1.44) - 1 = 1.2 - 1 = 20%. Check: 1,00,000 x 1.2 x 1.2 = 1,44,000. Dividing 44% by 2 gives 22%, which is the simple average and ignores compounding.
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