NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Investment
Ms. Kapoor's investment of Rs 1,00,000 grew to Rs 1,21,000 in two years with no interim cash flows. What is the compound annual growth rate (CAGR)?
The CAGR is 10%. The investment grew by a factor of 1.21 over two years, and the square root of 1.21 is 1.10, so the compounded annual rate is 10 percent. Simple averaging would wrongly give 10.5 percent.
- A10.5%
- B11.0%
- C9.5%
- D10.0%Correct
Explanation
CAGR = (121,000/100,000)^(1/2) - 1 = 1.21^0.5 - 1 = 1.10 - 1 = 10%. Simple averaging of the 21% total return gives 10.5%, which ignores compounding. Check: 1,00,000 x 1.1 x 1.1 = 1,21,000.
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