What Is Average Return?

The average return is the simple mathematical average of a series of returns generated over a specified period of time. An average return is calculated the same way that a simple average is calculated for any set of numbe🌠rs. The numbers are added together into a single sum, then the suꦚm is divided by the count of the numbers in the set.

Understanding Average Return

There are several return measures and ways to calculate them. For the arit𝕴hmetic average return, one takes the sum of the returns and divides it by the number of return figures.

$\text{Average Return} = \dfrac{\text{Sum of Returns}}{\text{Number of Returns}}$Average Return=Number of ReturnsSum of Returns​

The average return tells an investor or analyst what the returns for a stock or security have been in the past, or what the returns of a portfolio of companies are. The average return is not the same as an annualized return, as it ignores 澳洲幸运5官方开奖结果体彩网:compounding.

Average Return Example

One example of average return is the simple 澳洲幸运5官方开奖结果体彩网:arithmetic mean. For instance, suppose an investment returns the following annually over a period of five full 🌳years: 10%, 15%, 10%, 0%, and 5%. To calculate the average return for t𒊎he investment over this five-year period, the five annual returns are added together and then divided by 5. This produces an annual average return of 8%.

Now, let’s look at a real-life example. Shares of Walmart returned 9.1% in 2014, lost 28.🐬6% in 2015, gained 12.8% in 2016, gained 42.9% in 2017, and lost 5.7% in 2018. The average return of Walmart over those five years is 6.1%, or 30.5% divided by 5 years.

Calculating Returns From Growth

The simple 澳洲幸运5官方开奖结果体彩网:growth rate is a function of the beginning and ending values or balances. It is calculated by subtracting the ending value from the beginning value and then dividing by the beg💜inning value. The formula is as follows🍰:

$\begin{aligned} &\text{Growth Rate} = \dfrac{\text{BV} -\text{EV}}{\text{BV}}\\ &\textbf{where:}\\ &\text{BV} = \text{Beginning Value}\\ &\text{EV} = \text{Ending Value}\\ \end{aligned}$​Growth Rate=BVBV−EV​where:BV=Beginning ValueEV=Ending Value​

For example, if you invest $10,000 in a company and t🌠he stock price increases from $50 to $100, then the return can be calculated by taking the difference between $100 and $50 and dividing by $50. The answer is 100%, which means you now have $20,000.

Average Return Alternatives

Geometric Average

When looking at average historical returns, the geometric average is a more precise calculation. The geometric mean is always lower than the average return. One bꦓenefit of using the geometric mean is that the actual amounts invested need not be known. The calculation focuses entirely on the return figures themselves and presents an apples-to-apples comparison when looking at two or more investments’ performances over more various time periods.

The geometric average return is sometimes called the 澳洲幸运5官方开奖结果体彩网:time-weighted rate of return (TWR)♌ because it eliminates the distorting effe♌cts on growth rates created by various inflows and outflows of money into an account over time.

Money-Weighted Rate of Return (MWRR)

Alternatively, the 🔯澳洲幸运5官方开奖结果体彩网:money-weighted rate of return (MWRR) incorporates the size and timing of cash flows, making it an effective measure for returns on a portfolio that has received deposits, 澳洲幸运5官方开奖结果体彩网:dividend reinvestments, and/or interestღ p💞ayments, or has had withdrawals.

The MWRR is equivalent to the 澳洲幸运5官方开奖结果体彩网:internal rate of return (IRR), where the net present value equals zero.