The standard way multi-year returns get compressed into a single, comparable annual number.
CAGR (compound annual growth rate) is the constant yearly return that would turn the starting value into the ending value over the measured period, accounting for compounding. It's how a messy sequence of up years and down years gets boiled down into one comparable annual figure.
A simple average overstates the real result when returns are volatile — a year of +50% followed by a year of -50% averages to 0%, but actually leaves you with less money than you started with (1.5 × 0.5 = 0.75). CAGR accounts for this correctly; a simple average of yearly percentages doesn't.
CAGR is useful for comparing two return streams over the same period (strategy vs. benchmark), not for predicting the future — a strong historical CAGR says nothing certain about the next several years, especially over a short measurement window where a couple of unusual years can swing the number substantially.
A high CAGR from a backtest with real, disclosed limitations (like survivorship bias) should be discounted accordingly — this site's own backtest page shows the CAGR alongside exactly those limitations for that reason.
What is survivorship bias (and why the backtest on this site flags it)? What does "equal-weight" mean in a backtest?
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