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Compound Annual Growth Rate (CAGR) is the most accurate way to measure the historical return of an investment over multiple time periods. Unlike average absolute returns—which can be heavily skewed by one abnormally massive year—CAGR accounts for the mathematical effect of compounding. It smooths out volatility to show you the steady, year-over-year growth rate required to get from your starting capital to your ending balance.

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The Mathematical Formula

CAGR is calculated by dividing the ending value of the portfolio by its beginning value, raising that result to an exponent of one divided by the number of years, and subtracting one: CAGR=(Ending ValueBeginning Value)1t−1\text{CAGR} = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{t}} - 1 (Where tt represents the total number of years in the simulation).

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Why CAGR Matters

If a strategy drops by 50% in Year 1, it requires a 100% gain in Year 2 just to break even. An “Average Return” calculation would falsely report this as a +25% average annual return ([−50+100]/2[-50 + 100] / 2), even though you made zero money. CAGR ignores this noise. In the above scenario, the CAGR would accurately report 0.00%, giving you a brutally honest assessment of your actual capital creation.
Where to find this in Kalpi: Your strategy’s CAGR is prominently displayed at the top of the Performance Stats matrix, directly compared against the CAGR of your chosen benchmark.