Average annual growth rate is a relatively simple way of describing a portfolio's growth over time. The calculation involves dividing the profit investments have shown by the number of years involved. It doesn't take into account fluctuations in growth over the years or the ways that complications, like compounding, have impacted the figures.
Stepping away from finance for a second, imagine an 18 year old with a 30 inch waist. Now imagine the same person, now 33, with a waist measurement of 45. The AAGR of the person's waistline is 1 inch per year. What the calculation doesn't know is that everything was fine until the divorce and the layoff, and that for the last years, it just seemed like no one cared except Krispy Kreme and McDonald's. (Don't worry; we're feeling much better now.)
Anyway, AAGR is something of a back-of-the-envelope measure. However, in the financial realm, it's popular in marketing materials for investment outlets, things like mutual funds and financial advisors.
Average Annual Growth Rate can be used to calculate the increase of value for an investment. It's done by finding the mean value in a series of growth measurements. So to calculate it, you would find the annual rate of return for the business, then compare that year to the one before it to find the percentage it changed (hopefully as an increase). You could do this as many times as you wished to determine if it's increasing or decreasing, and by what percentage, for any length of time.
Related or Semi-related Video
Finance: What are Five Questions You Can...5 Views
Finance a la Shmoop! What are five questions, you can expect to be asked, in
a public market investing interview? Alright number one, it sounds
innocent enough of a question, right? And note that you aren't being asked, so what
do you think of GE here? As a relative newbie to investing, you are not expected
to have an opinion on much, of a range, of stocks. But it certainly is fair game to
ask you about one specific stock, you come up with, that you follow. So if you [two men in conference room]
answer, I don't really know, then well, just end the interview right there
and save everyone a whole lot of time. Two, and the interviewer may ask you, why?
Why, well you said you liked Apple. Well why do you like Apple and not the fruit
the computer company and the answer can't be because Kramer says so. That's
almost always the wrong answer. It also can't be, because I like the new iPhone,
or well who doesn't like Apple. Yeah you need metrics and an opinion. Like, well
the street doesn't appreciate Apples earnings power, from the new markets [interviewee talking to interviewer]
they're entering all over the world and the new push to sell really high margin
software through its home systems and the new products are totally
underestimated and it's good if your voice gets kind of high and squeaky like
that too, shows passion. Ok dandy, here you've given a claim that is different
from what any yutz can read about in the Wall Street Journal. Which is also, almost
always wrong. And remember if the journalists were actually good at
picking stocks, they'd pick stocks. They wouldn't make one thousandth of the
money per year just writing about stocks, or opinions of other people's opinions [woman in suit crying]
about stocks and or bonds and so on, right? So you have edge in your answer,
but you also need metrics. All right, three metrics. What are apples, why do you
like them, Hmm? Answer, well the published street
estimates are, 16 times earnings this year and 14 times next, and you sound
purposely semi cryptic. Because the presumption is that anyone who follows
stocks knows, that you're referring to, published stock broker, or sell side
research reports, when you say Street and that 16 and 14 are times the published [page with definitions]
estimated earnings numbers. So you speak Street, bully. But then you give edge, or
alpha. That is you say something like, the street
isn't appreciating the mountains of cash, Apple has over seas. The market cap of
the company is a trillion, but it has 350 billion of cash and no real debt. So if
you X out the 350 from the trillion, it's 650 billion dollars of equity cap and [man talking]
well on those numbers it's just twelve and ten times earnings. I think it's a
buy here. Yeah all right pretty good. Four vocab, well you won't be asked for a much
vocab lingo in your interview, or if you are the interviewer is just being a dick.
But by clearly elucidating the difference between, market cap and equity
cap. A subtle but important difference. In an Apple's case, well it's a huge and [mother and daughter swinging]
meaningful swing. Well then you are conveying the sense that you were
actually awake in class that day. Yeah, nice job. All right, moving on. Five, the
plan, so what's the plan. You have to have one. The right answer when the
interviewer asks you, what's your plan? Is usually something like, well I'd like to
eat nails 80 hours a week here, for three years, then go to business school and
work on my golf game. Or it might be, I don't want an MBA, I'm gonna bring a [farmer talking]
watering can, to plant my roots in whatever firm I go to next. So I'm having
deep conversations with just a handful of firms, I've come to admire. Or it might
be, I really should have answered the questions you asked better, I'll go now.
Yeah, or it might even be, sir for the millionth time, I'm not a financial
analyst, I work at McDonald's and I'm just trying to give you back your change.
You wanted fries with that, so here you go. [McDonalds employee]
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