How to Calculate Average Return
What is Average Return?
An average return calculator computes the mean annual return on an investment over multiple years, either as a simple average or as CAGR (Compound Annual Growth Rate) which accounts for compounding.
Formula
Simple avg = Σ returns / n years; CAGR = (End value / Start value)^(1/years) − 1
- r
- Annual return (%)
- CAGR
- Compound Annual Growth Rate (%)
- n
- Number of years
Step-by-Step Guide
- 1Simple average: sum of annual returns / number of years
- 2CAGR: (End value / Start value)^(1/years) − 1
- 3CAGR is more accurate for measuring true investment growth
- 4Arithmetic mean overstates returns when there is volatility
Worked Examples
Input
Returns: 10%, −5%, 20% over 3 years
Result
Simple avg = 8.33%; CAGR = (1.10×0.95×1.20)^(1/3)−1 = 7.84%
Frequently Asked Questions
Why is CAGR more accurate than simple average?
CAGR accounts for compounding effects and volatility. A simple average can overstate returns when there are swings.
What does CAGR of 7.84% mean?
Your investment grew at a steady rate of 7.84% per year on average, accounting for compounding.
Can CAGR be negative?
Yes, if your ending value is less than starting value, CAGR will be negative, indicating a loss.