CAGR (Compound Annual Growth Rate) is the most commonly used metric to express the annualised return of an investment over a period longer than one year. It smooths out the volatility of year-to-year returns into a single, easy-to-compare number.
Formula
CAGR = (Ending Value / Beginning Value)^(1/n) - 1
Where n is the number of years.
Example
If you invest ₹1,00,000 and it grows to ₹2,00,000 over 5 years:
CAGR = (2,00,000 / 1,00,000)^(1/5) - 1 = 14.87%
Why It Matters in Backtesting
CAGR allows you to compare strategies with different time periods on an equal footing. A strategy that returned 200% over 10 years (CAGR: 11.6%) is directly comparable to one that returned 50% over 3 years (CAGR: 14.5%).