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Author: FinanceNerd Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 62  
Subject: CAGR vs expected return Date: 1/26/2008 4:22 PM
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Which is better measure of future performance? CAGR or expected return?

I have been thinking about this for a while and can't arrive at an acceptable answer.

CAGR will give you the actual return of a portfolio. CAGR which is the geometric average will always be less than the expected return. This is due to the nature of numbers. If you have an expected return with a certain volatility, the actual return will be less. For example, a 10% return and a 10% loss will result in a total loss of of 1 % (1.1 x .9 = .99).

So CAGR might be better than expected return in one sense because it's somewhat risk adjusted. If one has two assets that have the same exact expected return, the one with increased volatility will have a lower CAGR.

But, I was doing some simple math on the random probability distributions. The expected return x number of years should equal the expected value.

So it seems CAGR multiplied by the number of years should give you the actual (and also probable future) return of the portfolio. However, the expected return multiplied by the number of years should give you the expected value of the portfolio. But, this statement doesn't seem to make any sense.

Any help on this is appreciated.

Or, can anyone suggest a finance article that discusses this topic.
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