You should also compare this to what you want to make (for example real estate returns on average 10-12%, current crypto defi rates such as at Celsius provide upwards of 8.50% in CAGR). thus we can now compare our CAGR with these benchmarks and figure out whether or not our model is beating a traditional buy and hold. What is a Good CAGR?Īs mentioned before, we use CAGRs to compare with different benchmarks such as the SPY, BTC-USD, Russel 100, etc. These will clearly have different cumulative returns so you will HAVE to use CAGR. When you're backtesting, you might run one strategy for 30 years whereas another one for 10. It's much easier to analyze annualized returns because various strategies will have been run longer than others. Use CAGR as a way to easily compare your returns across strategies. Nice! Now how do we implement this formula? As you can see it's pretty straightforward, if we have our start and end balance.Īccount_values = def cagr (start_value : float, end_value : float, years : int ) : return (end_value / start_value ) ** ( 1.0 / years ) - 1Ĭagr (account_values, account_values, 5 ) # 0.3797. Now using this formula we can see that our strategy has an annualized return of (500 / 100)^(1/5) - 1 = 37.97%.

Shoutout Investopedia for a nice and beautiful formula :D To do this we annualize our return with the following formula:

what is the 'annual return' of your portfolio? With that, we can then easily compare this to things like the SPY (which has a CAGR of 9.9%). Well what's your cumulative return? (500 - 100) / 100 = 400%īut what does that tell you about how much you made over the years-i.e. Let's say that your strategy started out with $100 and after 5 years you turned your money into $500. Okay, that's a little confusing, so let's use an example. What does the CAGR tell us? Well it takes our cumulative return (how much did we cumulatively make across X years of a backtest or a strategy), and finds the percentage that makes it such that your cumulative return was equal to your portfolio growing at Y% per year. Compound Annual Growth Rate - Starting Easy 😉Ĭompound Annual Growth Rate (or CAGR for short) is one of the most important metrics and the most traditional metrics out there. I've also implemented all of these in an easy to use and copy gist. Also, here are some great explanations on some of the metrics that we go over today. If you want to see more metrics or don't want to implement all of these yourself, you can take a look at the Blankly package that is one of the fastest and easiest to set up trading packages out there. We're going to go through 5 useful metrics in this post. No one metric can tell you whether or not a stock is a good buy or not, nor can one metric tell you if your model is good or bad. Before we go into them, I think it's super important to keep in mind that not one metric tells an entire story, just like a person is not just governed by their name. Now for many people new to quant or even pros probably don't know all of these metrics and each of these metrics might be used for a variety of use cases. That's awesome, now how do we actually measure that? How do we measure risk, returns, and all of these other factors? Well that's why we have metrics. A model does well when it successfully produces high returns year-over-year while reducing the amount of risk for those returns

Doing well is not just about how much money you make, but also about when you make it and how much risk you are taking on. So I propose a different statement of doing well. Ahh, you see now the question gets much more nuanced as there are a lot more factors. But then this begs the question of a multitude of things: 'when do I get my returns?', 'how do I get my returns?', 'do I care about my returns every year', and, arguably one of the MOST important questions, 'what are my chances of NOT getting my returns', i.e. your return on investment (which can come in many forms too as we will soon see). Now when you think of a good investment strategy, what do you think the most important thing is? First and foremost, at least for most people it is, 'I want to make the most amount of money possible', i.e.

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