1. What is Average Rate of Return?

The Average Rate of Return is a simple measure of investment performance calculated by dividing the sum of returns by the number of periods. It provides a basic understanding of investment performance over time.

2. How Does the Calculator Work?

The calculator uses the average return formula:

Where:

• Sum of Returns — Total returns over all periods (decimal)
• Number of Periods — Count of time periods (unitless)

Explanation: This calculation gives the arithmetic mean of returns, showing the average performance per period.

3. Importance of Average Return Calculation

Details: Average return helps investors compare different investments and understand overall performance, though it doesn't account for compounding or volatility.

4. Using the Calculator

Tips: Enter the total sum of returns (as decimal, e.g., 0.15 for 15%) and the number of periods. Number of periods must be at least 1.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between average and annualized return?
A: Average return is a simple arithmetic mean, while annualized return accounts for compounding effects over time.

Q2: When is average return most useful?
A: For comparing investments over the same time period or for short-term investments where compounding is less significant.

Q3: What are limitations of average return?
A: It doesn't reflect volatility or the sequence of returns, which can significantly impact actual investment outcomes.

Q4: How should returns be formatted?
A: Enter returns as decimals (e.g., 0.10 for 10%). For percentages, divide by 100 before entering.

Q5: Can I use this for negative returns?
A: Yes, the calculation works the same way for negative returns (losses).