NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds
An investor invested Rs 1,00,000 in a scheme and the value grew to Rs 1,44,000 after exactly 2 years, with no interim cash flows. What is the compounded annual growth rate (CAGR)?
The CAGR is 20%. The investment grew 1.44 times in two years, and the square root of 1.44 is 1.20, so the annual compounded growth is 20%. Dividing the 44% absolute gain by two gives 22%, which ignores compounding and is wrong.
- A22.00%
- B20.00%Correct
- C44.00%
- D18.32%
Explanation
CAGR = (1,44,000 / 1,00,000)^(1/2) - 1 = sqrt(1.44) - 1 = 1.20 - 1 = 20%. Check: 1.2 x 1.2 = 1.44. Simple averaging of the 44% total gain gives 22%, which ignores compounding. The 44% is the total absolute return, not annual.
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