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

An investment of Rs 50,000 grows to Rs 72,000 in 3 years, with no interim cash flows. Which of the following is the closest approximation of its compound annual growth rate (CAGR)?

The CAGR is about 12.9%. The investment grew 1.44 times in three years, so the annual rate is the cube root of 1.44 minus one. Dividing the 44% total return by three overstates the rate because it ignores compounding.

  1. A12.9%Correct
  2. B14.4%
  3. C44%
  4. D15.5%

Explanation

Growth ratio = 72,000/50,000 = 1.44. CAGR = 1.44^(1/3) - 1. Since 1.129^3 is about 1.439, CAGR is about 12.9%. The 14.4% option is the ratio 1.44 divided by 3 growth years incorrectly (44%/3 is 14.7%, a simple average). 44% is total return.

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