What is the average return?
The average return is the general average of a series of the rate of returns created over a period of time. The average return is calculated in the same way as general average is calculated. The series of returns are added into to a single sum and then divided by the count of the number of the series. If the average rate of return is calculated as normal average the result is not accurate. To get the accurate result geometric mean return or the money-weighted return is used. The benefit of using the geometric mean return is the initial amount invested is not required, the average return mainly focused on the returns over a period of time.
The average rate of return:
The average rate of return is also known as the accounting rate of return. The average rate of return is the annual average amount of cash flow created over a period of investment. The average rate of return is calculated by adding all expected cash flow and divided by the number of years that the investment is filed. The main disadvantage of this calculation the time value of money and cash flow is not considered that can be an integral part of maintaining a business. The average rate of return is calculated by dividing the average accounting profit by the initial investment and the calculation includes the depreciation and amortization.
The cumulative return is a combined amount an investment has gained or lost over a time irrespective of term period of involved. The investor doesn’t prefer cumulative returns much but compound returns are preferred as it is accounted annually that helps the investor to compare with different investment methods.
The components included in the average return calculator:
Average return based on cash flow:
- Starting balance.
- Ending balance.
Average and cumulative return:
- Holding length. (Years and months)
This calculator helps to estimate the average annual return of the total amount included. There are two scenarios in calculating the average return. The first one is based on cash flow and the second one is the cumulative return.