A measure of an average yearly growth of an investment over a certain time period when returns are reinvested is
A measure of an average yearly growth of an investment over a certain time period when returns are reinvested is
Solution
The question asks for the term that describes average yearly growth when returns are reinvested.
The key phrase is "returns are reinvested" - this indicates compounding, where earnings generate additional earnings over time.
Compound Annual Growth Rate (CAGR) measures the average yearly growth while accounting for reinvested returns.
CAGR calculates what steady annual rate would be needed to grow an investment from its initial value to its final value over a specific time period, assuming all returns are reinvested.
For example, if an investment grows from 200 over 3 years, CAGR determines the consistent yearly rate that would achieve this growth with reinvestment.
Annual Average Growth Rate is a simple arithmetic average of growth rates over multiple years. It does not account for the compounding effect of reinvested returns, making it less accurate for measuring investment performance.
Nominal Rate represents the stated interest rate without adjusting for compounding frequency or inflation. It does not measure actual growth over a time period or incorporate reinvestment calculations.
Linear Depreciation Rate measures how assets lose value over time at a constant rate. This applies to depreciating assets like machinery or vehicles, not investment growth.
The answer is Compound Annual Growth Rate.
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