Which of the following is correct about the compound annual growth rate(CAGR)?

CAGR stands for Compound Annual Growth Rate.

The CAGR formula is:

$\text{CAGR} = \left[\left(\frac{\text{Final Value}}{\text{Beginning Value}}\right)^{(1/n)} - 1\right] \times 100$

where $n$ is the number of years.

The formula requires:

• Final Value (ending amount)
• Beginning Value (starting amount)
• Time period ($n$)

CAGR needs both the beginning and final values.

Option 1: CAGR is calculated by only the final value of an investment.

This is incorrect. The formula requires both the final value and beginning value to calculate growth.

Option 2: CAGR is calculated by the final and beginning value of an investment.

This is correct. The formula divides Final Value by Beginning Value, requiring both inputs.

Option 3: CAGR describes the effect of simple interest.

This is incorrect. CAGR measures compound growth, not simple interest.

Option 4: CAGR is calculated by taking arithmetic mean of series of returns.

This is incorrect. CAGR uses the geometric mean concept (indicated by the power of $1/n$), not the arithmetic mean.

Therefore, the correct answer is Option 2.