NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
An investor puts Rs 1,00,000 in a scheme. Returns for year 1 are +20% and for year 2 are -10%. What is the compounded annual growth rate (CAGR) over the two years, approximately?
The CAGR is about 3.9%. Rs 1,00,000 grows to Rs 1,20,000 and then falls 10% to Rs 1,08,000, so the two-year growth factor is 1.08 and its square root is about 1.039. The 5% arithmetic average overstates the compounded return.
- A5.0%
- B3.9%Correct
- C10.0%
- D8.0%
Explanation
Value after 2 years = 1,00,000 x 1.20 x 0.90 = 1,08,000. CAGR = sqrt(1.08) - 1 = 1.0392 - 1 = about 3.9%. The 5% figure is the arithmetic average of +20 and -10, which overstates the compounded return.
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