NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
Neha invests Rs 1,00,000 and its value becomes Rs 1,21,000 after 2 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. Dividing the 21% total return by two to get 10.5% is wrong because it ignores compounding.
- A10.0%Correct
- B10.5%
- C11.0%
- D21.0%
Explanation
CAGR = (1,21,000 / 1,00,000)^(1/2) - 1 = sqrt(1.21) - 1 = 1.10 - 1 = 10%. 10.5% is the simple average of annual return (21% / 2), which ignores compounding. 21% is the total return, not annualised.
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