NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
Rohan invested Rs 50,000 in a fund and after 2 years it was worth Rs 60,500. Assuming no interim cash flows, what is the compound annual growth rate (CAGR)?
The CAGR is 10%. The investment grew 1.21 times in two years, and the square root of 1.21 is 1.10, meaning a compounded annual growth of 10%. The 21% figure is merely the total absolute return over the period.
- A10%Correct
- B21%
- C10.5%
- D11%
Explanation
Growth multiple is 60,500/50,000 = 1.21. Square root of 1.21 is 1.10, so CAGR is 10%. The 21% option is the absolute return over two years, not annualised, and 10.5% is the simple average of annual returns, which ignores compounding.
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