# Understanding Average Return: Definitions, Formulas, and Illustrations

## What is Average Return?

The average return is a financial metric that measures the average gain or loss of an investment over a specific period of time. It is used to evaluate the performance of an investment or a portfolio of investments. The average return provides investors with an indication of how well an investment has performed on average.

To calculate the average return, you need to determine the returns of the investment for each period and then calculate the average of these returns. The returns can be expressed as a percentage or a decimal value.

The average return is an important measure for investors as it helps them assess the risk and return potential of an investment. A higher average return indicates a higher potential for gain, while a lower average return indicates a higher potential for loss. It is important to note that the average return does not guarantee future performance and should be used in conjunction with other investment analysis tools.

Investors can use the average return to compare the performance of different investments or to evaluate the performance of their own investment portfolio. By comparing the average returns of different investments, investors can identify which investments have performed better or worse over a specific period of time.

## Calculating Average Return: Formulas and Methods

Calculating average return is an important step in analyzing investment performance. It provides investors with a measure of the overall profitability of their investments over a given period of time. There are several formulas and methods that can be used to calculate average return, depending on the specific data available and the desired level of accuracy.

One commonly used formula for calculating average return is the arithmetic mean. This formula involves summing up the returns of each individual investment and dividing the total by the number of investments. The resulting value represents the average return for the portfolio.

Another method for calculating average return is the geometric mean. This formula takes into account the compounding effect of returns over time. It involves multiplying the returns of each individual investment and taking the nth root of the product, where n is the number of investments. The resulting value represents the average annualized return for the portfolio.