CAGR
CAGR is the annualized rate of return that, if applied uniformly each year, would turn your starting value into your ending value over the backtest window.
The math
CAGR = (V_end / V_start)^(1/Y) − 1V_end = ending portfolio value, V_start = starting value, Y = number of years in the backtest.
Why it matters
A raw total return of 50% means very different things over 3 months vs 5 years. CAGR normalizes by time so you can compare strategies with different backtest lengths on the same scale. It is the standard metric for long-horizon performance reporting (Bacon 2008).
CAGR assumes continuous compounding and ignores the path — a strategy that returned −40% in year one and +130% in year two and one that returned +20% each year both show the same CAGR if the endpoint matches. Max Drawdown and Sharpe capture the path.
Published source
Bacon, C. R. (2008). Practical Portfolio Performance Measurement and Attribution (2nd ed.). Wiley.