Using The Following Returns Calculate The Average Returns

Calculating the average returns from a series of investment returns is essential for evaluating investment performance. This guide explains the process step-by-step, provides a calculator, and offers practical interpretation tips.

How to Calculate Average Returns

The average return is a fundamental metric used to assess the performance of an investment over a period. It provides a single number that represents the overall profitability of the investment.

Steps to Calculate Average Returns

List all the individual returns from your investment period
Count the number of returns in your list
Sum all the individual returns
Divide the total sum by the number of returns

When to Use Average Returns

Average returns are particularly useful for:

Comparing different investment strategies
Assessing the performance of a portfolio over time
Evaluating the risk-adjusted performance of investments
Making informed decisions about future investments

Important Note

While average returns provide a useful overview, they don't account for the timing of returns or the volatility of the investment. Always consider these factors when evaluating investment performance.

The Formula

The formula for calculating average returns is straightforward:

Average Return Formula

Average Return = (Sum of Individual Returns) / (Number of Returns)

Where:

Sum of Individual Returns is the total of all returns from each period
Number of Returns is the count of individual returns in the period

The result is typically expressed as a percentage, representing the average return per period.

Worked Example

Let's calculate the average returns for an investment that had the following monthly returns over a year:

Month	Return (%)
January	5.2
February	3.8
March	6.1
April	4.5
May	5.9
June	3.2
July	4.7
August	5.3
September	4.1
October	6.4
November	3.9
December	5.6

Using the formula:

Calculation

Sum of Returns = 5.2 + 3.8 + 6.1 + 4.5 + 5.9 + 3.2 + 4.7 + 5.3 + 4.1 + 6.4 + 3.9 + 5.6 = 58.7

Number of Returns = 12

Average Return = 58.7 / 12 = 4.89%

The average monthly return for this investment was 4.89%.

Interpreting Results

When interpreting average returns, consider the following:

Positive vs. Negative Averages

A positive average return indicates overall profitability, while a negative average suggests losses. However, the timing of these returns matters significantly.

Comparison with Benchmarks

Compare your average returns with industry benchmarks or market averages to assess performance relative to the broader market.

Risk Considerations

While average returns show profitability, they don't account for risk. Investments with higher average returns may also have higher volatility.

Time Horizon

The time period over which you calculate average returns affects the interpretation. Shorter periods may show more volatility, while longer periods provide a more stable view.

FAQ

What is the difference between average return and compound annual growth rate (CAGR)?

Average return calculates the arithmetic mean of individual returns, while CAGR accounts for the compounding effect of returns over time. CAGR provides a more accurate measure of investment growth over time.

Can I use average returns to compare different investments?

Yes, average returns can be used for initial comparisons, but it's important to consider other factors like risk, volatility, and time horizon for a complete assessment.

What if my investment has negative returns for most of the period?

A negative average return indicates overall losses, but the timing of these losses matters. Investments with negative returns early in the period may recover more easily than those with losses later.

How often should I calculate average returns?

Average returns are typically calculated over a specific period, such as a year or quarter, depending on your investment strategy and goals.