What Is an Average Return?

The average return, a measure of an investment's typical profit, is calculated by aggregating returns and dividing by their sum, allowing for comparisons and performance tracking.

Oct 20, 2024 at 10:18 am

What is an Average Return?

An average return is a measure of the central tendency of a series of returns. It is calculated by adding up all the returns in a series and then dividing by the number of returns. The average return can be used to compare the performance of different investments, or to track the performance of an investment over time.

1. Simple Average Return

The most basic type of average return is the simple average return. To calculate the simple average return, you simply add up all the returns in a series and then divide by the number of returns. For example, if you have a series of returns of 10%, 15%, and 20%, the simple average return would be 15%.

2. Weighted Average Return

A weighted average return is a more sophisticated type of average return that takes into account the size of each return. To calculate the weighted average return, you multiply each return by its weight and then divide the sum of the products by the sum of the weights. The weights are typically based on the amount of money invested in each asset. For example, if you have a series of returns of 10%, 15%, and 20%, and you have invested $100 in each asset, the weighted average return would be 15%.

3. Time-Weighted Average Return

A time-weighted average return is a type of average return that takes into account the timing of the returns. To calculate the time-weighted average return, you multiply each return by the length of time that the return was held and then divide the sum of the products by the total length of time. For example, if you have a series of returns of 10%, 15%, and 20%, and you held the first return for one year, the second return for two years, and the third return for three years, the time-weighted average return would be 15%.

4. Geometric Average Return

A geometric average return is a type of average return that is calculated by multiplying all of the returns in a series together and then taking the nth root, where n is the number of returns. The geometric average return is often used to compare the performance of different investments over time, as it takes into account the compounding effect of returns. For example, if you have a series of returns of 10%, 15%, and 20%, the geometric average return would be 14.9%.