Question 1

What is the difference between simple ROI and Compound Annual Growth Rate (CAGR)?

Accepted Answer

Simple Return on Investment (ROI) calculates total cumulative profit divided by total cost basis. CAGR geometric mean measures the steady annual growth rate required to grow from initial value to final value across multi-year horizons.

Question 2

How does Dividend Reinvestment (DRIP) accelerate portfolio growth?

Accepted Answer

Reinvesting dividends automatically purchases additional shares without incurring transaction commissions. Over time, these newly acquired shares generate their own dividends, producing secondary exponential compounding.

Question 3

How do capital gains taxes affect realized investment returns?

Accepted Answer

Investments held over one year qualify for long-term capital gains tax rates (0%, 15%, or 20% in the US), which are significantly lower than ordinary income tax rates on short-term trades.

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