Compound Annual Growth Rate - CAGR

Compounded Annual Growth rate (CAGR) is a business and investing specific term for the smoothed annualized gain of an investment over a given time period. CAGR is not an accounting term, but remains widely used, particularly in growth industries or to compare the growth rates of two investments because CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. CAGR is often used to describe the growth over a period of time of some element of the business, for example revenue, units delivered, registered users, etc.


the formula is 

Let’s understand it with an example.

Year =>	0	1	2	3	4	5	6
Growth Rate in the year		20%	-8%	11%	-5%	35%	5%
Value of Investment	100.00	120.00	110.40	122.54	116.42	157.16	165.02

The CAGR will be calculated based on the evidence that an investment of Rs. 100.00 turned out to be Rs. 165.02 in 6years.
The CAGR will be (165.02/100) ^ (1/6) – 1 = 0.0871 = 8.71%
This means if the investment grows at 8.71% for 6 years, value of Rs. 100 will be Rs. 165.

Uses of CAGR:
CAGR is a very useful number. It is used to measure the rate of almost every parameters that changes over time in a non-linear fashion. Some of them can be measuring GDP of a nation, investment in risky assets such as equity or equity based funds where the returns are non-linear, or growth in highways in terms of length in kilometre. The uses of CAGR are humongous. In our case, we will focus on CAGR with respect to investment in the market.

Let’s look at some of the uses and advantages of CAGR.

1.    It is useful in measuring the change in parameters which follow non-linear pattern. This is the reason we usually see the use of CAGR in earning growth, revenue growth, and EPS growth and many more parameters.

2.    It cuts through the noise and expresses returns in nice and convenient format. CAGR is very useful number as this eliminates the volatility of different investment and provides a figure that is understandable.  Take the above mentioned example, how will you know what that investment meant. Imagine a stock broker or a bank agent coming to you and showing you the data of last 6 years with the returns, what will you infer? Instead of the data, if the bank agent shows you the number CAGR of 8.71%, you can easily understand the value of investment and decide accordingly.

3.    CAGR helps in comparing investment across the spectrum.Take the same example, if the broker or bank agent shows you the details and not CAGR, you will not be able to tell whether this investment is better than investment in high grade bond (say L&T corporate bond). However, once you know the CAGR, it is easier to compare the bond rate of L&T and decide where to invest. Of course, there are other factors like volatility which also play a part in your decision but more on this later). In the same way, CAGR can be used to compare return on two or more stocks, mutual funds, portfolios, or any financial instrument.

Disadvantages of CAGR:
There are some pitfalls of CAGR too which should not be ignored. Remember, CAGR eliminates volatility from the picture and presents a number which is convenient to us. In reality, things are different.
First, most of the investors, while looking at CAGR forget the volatility part. The underlying assumption is that the investment will give a return of x% (in the example, 8.71%), year after year. This is not correct. The investor should keep the volatility factor in mind.

Second, the CAGR is calculated on past data. The past data may not truly represent the expected future growth. This may mislead investors. For example, the CAGR of inflation in India from 2000 to 2008 may be about 4%-5%. If an analyst would have projected in 2008, the expected inflation rate in 2009-2012, the data would have been completely misleading. We know that inflation in last 2 years is in double digit.
Third, timing is crucial in CAGR. As shown in above example on inflation, the time between 2000 and 2008 is not a right predictor of future inflation.

Lastly, we have to also consider the duration in which the CAGR is calculated. A too short duration can give you misleading picture because of business cycle. For example, if we invest in infrastructure mutual fund based on last 3 years data (especially if these 3 years were booming), our expectation will not be met. At the same time, too long duration will make the CAGR invalid for any expected projection in future. For example, if we take 30 years CAGR for Walkman business of Sony Corp and project the same going forward, our projection will be wrong because the times have changed and the sale of Walkman is dwindling.

source: wikipedia , investopedia

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Global flower trade threatens rare palm

Demand for leaves from an endangered palm, found in Central and South America, is threatening the species' long term survival, a study warns.

Leaves from the xate palm are used by the international flower trade, and are mostly harvested from wild trees.

UK researchers said training locals to cultivate the trees, thus easing the pressure on the wild population, only had a limited success.

The findings have been published in the journal Plos One.

"One of the reasons why florists like this leaf so much is because once you have cut it, it stays green for 30-40 days," explained co-author Sophie Williams, a researcher from Bangor University, Wales.

"There can be about two weeks from the forest to the florist, yet they can still store it for another two or three weeks."

Previous studies had said that the plant, which generally has five leaves, would be damaged if more than two leaves were removed at any one time.

The peak in demand, which is estimated to be worth $4m each year, for the leaves coincides with Mothers' Day and Palm Sunday.

Once harvested, the leaves are transported to Cancun, Mexico, before being exported to destinations including Miami and Amsterdam.

Barriers to growth

Overharvesting is a common threat facing many threatened plant species, and cultivation training is seen as one way to ease the pressure on wild populations.

Continue reading the main story

 

In 2006, the UK Darwin Initiative Project and the Belize Botanic Garden set up a training programme, with the aim of giving locals the knowledge to grow and harvest the species rather than harvesting wild palms.

In detail: Xate palm

• Xate is pronounced "Shatay"
• Scientific name: Chamaedorea ernesti-agusti
• Can reach two metres in height
• The plants generally grow up to five leaves
• It is a shade species; direct sunlight bleaches the leaves
• Harvesting more than two leaves from an individual plant damages its reproductive capabilities

Ms Williams and the team, which included a researcher from the Royal Botanic Gardens, Kew, used the study to assess whether the training programme had a beneficial effect.

"People will often state that we need environmental education or training, and people often see it as a panacea to protect species," she told BBC News.

"I agree that we need these things, but we also need to think about the context in which we are doing them.

"The training programme was great... but we need to look at other factors that could prevent the training from having an impact.

"Just increasing knowledge and awareness doesn't always lead to positive action all the time, and that is often because… there are barriers."

These barriers included long-term land tenure. This could act as a deterrent because it takes four years for the palm (Chamaedorea ernesti-agusti; another common name is fishtail palm) to grow before its leaves can be harvested.

If a farmer could not secure tenure of some land for long enough, then it would not be cost-effective to invest in cultivating the crop.

Access to seeds is another potential problem that could dilute the impact of a training programme.

Ms Williams said if there was not a supply of seeds for farmers, then it could encourage seeds to be taken from the wild population.

This practice, studies suggest, can be more damaging to the palms than harvesting leaves.

Ms Williams, a PhD student, said the next stage of her research is to assess whether increased cultivation is an effective conservation tool and eases the pressure on wild plants, or merely increases the supply of the economically important crop.

sumber : bbc

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Dampak Keyboard QWERTY pada Makna Kata

Pakar psikologi sosial di New School for Social Research mengatakan bahwa kesulitan dalam menggunakan obyek tertentu berpengaruh pada cara orang menilai obyek tersebut.

Salah satu contoh adalah nama orang. Dikatakan bahwa semakin sulit seseorang melafalkan nama orang lain, seseorang tersebut akan semakin sulit menilai orang itu secara positif.

Kini, ada contoh kasus baru yang dikaji peneliti. Dikatakan bahwa semakin sulit seseorang mengetik suatu kata di keyboard, maka semakin negatif pula makna kata itu.

Kyle Jasmine dan Daniel Casasanto dari University of College London meneliti tentang QWERTY effect, dampak pada makna kata yang dihasilkan ketika orang mengetik dengan keyboard QWERTY.

Jasmine mengungkapkan, kata-kata yang dengan huruf lebih banyak di sebelah kanan keyboard QWERTY (sebelah kanan T, G, dan B) memiliki makna lebih positif.

Contohnya, kata "POOL" yang berarti kolam memiliki makna lebih positif daripada kata "DESERT" yang berarti gurun. Contoh lain adalah kata "IKAN" dan "DERAS".

Menurut Jasmine, hal itu terkait dengan kemudahan mengetik. Lebih mudah bagi manusia untuk mengetik huruf di sebelah kanan keyboard QWERTY daripada yang ada di sebelah kiri.

"Jika mudah, maka cenderung memiliki makna positif. Jika sulit, maka akan sebaliknya," ungkap Jasmine seperti dikutip Wired pada Rabu (7/3/2012).

Faktor yang semakin mendukung hasil penelitian tersebut adalah huruf yang terkesan padat di sebelah kiri sehingga semakin menyulitkan pengetikan. Orang juga cenderung mengetik huruf di sebelah kanan lebih cepat.

Dalam eksperimen, Jasmine menganalisis 1.000 kata dalam bahasa Inggris, Spanyol, dan Belanda. Ia menemukan bahwa QWERTY effect memang terbukti.

Dalam eksperimen lain, 8.000 juru ketik juga diminta Mechanical Turk Service di Amazon.com untuk memberi kesan atas sebuah kata yang dihasilkan keyboard QWERTY. Hasilnya juga serupa.

Jasmine menuturkan, "Ini adalah demonstrasi pertama yang menunjukkan bagaimana kata-kata membentuk makna dalam waktu tertentu." Apakah Anda percaya efek QWERTY ini?

sumber : kompas

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