NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Mutual Funds
Mr. Iyer invested Rs 1,00,000 in a fund. After year 1 the value was Rs 1,20,000 and after year 2 it was Rs 1,08,000, with no interim cash flows. What is his compound annual growth rate (CAGR) over the two years, approximately?
The CAGR is about 3.9% per year. The value grew by a factor of 1.08 over two years, so the annual compound rate is the square root of 1.08 minus one, not the simple average or half of the 8% total return.
- A4.0%
- B8.0%
- C3.9%Correct
- D10.0%
Explanation
Total growth = 1,08,000/1,00,000 = 1.08. CAGR = sqrt(1.08) - 1 = 1.03923 - 1, about 3.9%. Simple average of 20% and -10% gives 5%. Dividing total return 8% by 2 gives 4%, which ignores compounding.
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