NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
An investor's portfolio value rises from Rs 2,00,000 to Rs 2,40,000 in exactly 2 years, with no additions or withdrawals. What is the approximate compound annual growth rate (CAGR)?
The CAGR is about 9.5% per year. The portfolio grew by a factor of 1.2 over two years, and the square root of 1.2 is roughly 1.0954. Dividing the 20% total gain by two to get 10% ignores compounding and overstates the annual rate.
- A10.0%
- B20.0%
- C9.5%Correct
- D8.7%
Explanation
Growth multiple = 2,40,000/2,00,000 = 1.2. CAGR = 1.2^(1/2) - 1 = 1.0954 - 1, about 9.5%. The 10% option is the simple average of the 20% total gain, which ignores compounding; 20% is the absolute return.
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