What is the average yield?
Average return is the simple mathematical average of a series of returns generated over a period of time. An average return is calculated in the same way that a simple average is calculated for any set of numbers. the numbers are added into a single sum, and then the sum is divided by the count of the numbers in the set.
The formula for average performance
Average return = sum of returnsnumber of returns \ text {average return} = \ dfrac {\ text {sum of returns}} {\ text {number of returns}} average return = number of returns sum of returns
How to calculate average performance
There are several measures of return and ways to calculate them, but for arithmetic average performance, one takes the sum of the returns and divides it by the number of return figures.
What does average performance tell you?
Average return tells an investor or analyst what the returns were on a stock or security in the past or what the returns are on a portfolio of companies. This is not the same as an annualized return. average return ignores compounding.
Key findings
- Average return is the simple mathematical average of a series of returns.
- It can help measure the past performance of a security or the performance of a portfolio.
- The geometric mean is always less than the average yield.
Example of how to use average performance
An example of average performance is the simple arithmetic mean. For example, suppose that an investment returns the following annually for a full five-year period: 10%, 15%, 10%, 0%, and 5%. To calculate the average return on the investment over this five-year period, the five annual returns are added together and then divided by 5. This produces an average annual return of 8%.
Or consider wal-mart (nyse: wmt). wal-mart’s shares 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. wal-mart’s average return in those five years is 6.1% or 30.5% divided by 5 years.
Calculate growth returns
The simple growth rate is a function of the beginning and ending values or balances. It is calculated by subtracting the ending value from the starting value and then dividing by the starting value. The formula is as follows:
Growth rate = bv − evbvwhere: bv = beginning valueev = ending value \ begin {aligned} & \ text {growth rate} = \ dfrac {\ text {bv} – \ text {ev}} {\ text {bv}} \\ {\ bf where:} \\ \ text {bv} = \ text {initial value} \\ \ text ev} = {\ text {value} end \\ \ end {aligned} growth rate = bv BV – ev where: bv = initial value ev = final value
For example, if you invest $ 10,000 in a company and the stock price increases from $ 50 to $ 100, the return can be calculated by taking the difference between $ 100 and $ 50 and then dividing by $ 50. The answer is 100 percent , which means you now have $ 20,000.
The difference between the average performance and the geometric average
When looking at the average historical performance, the geometric average is a more accurate calculation. the geometric mean is always less than the average yield. An advantage of using the geometric mean is that it is not necessary to know the actual amounts invested. The calculation focuses entirely on the performance figures and presents an “apples to apples” comparison when the performance of two or more investments is observed over longer periods of time.
Geometric average return is sometimes called a time-weighted rate of return (twrr) because it removes the distorting effects on growth rates created by various money inflows and outflows in an account over time.
Alternatively, the money-weighted rate of return (mwrr) incorporates the size and timing of cash flows, making it an effective measure for the returns of a portfolio that has received deposits, dividend reinvestments, interest payments or has had withdrawals. the money-weighted return is equivalent to the internal rate of return where the net present value equals zero.
Limitations of using average performance
Simple average of returns is an easy calculation, but it is not very accurate. For more accurate performance calculations, analysts and investors also frequently use geometric mean or money-weighted return.
