The average return is a measure of investment performance that calculates the overall gain or loss on an investment over time. It takes into account both positive and negative returns, as well as their varying levels of magnitude, to provide an indication of how much an investor has gained or lost from making the investment.
The average return is calculated by adding up all the gains and losses over a specific period (usually expressed in terms of years) and dividing that total by the number of years being considered. This provides a clear picture of whether the investment was successful, unsuccessful or broke even on an overall basis.
For example, if an investor made $10,000 in profits over three years but also experienced two years where they lost $2,500 each time, their average return would be calculated as follows: ($10,000 + (-$2,500) + (-$2,500)) / 3 = -$625. This means that the investor has a negative average return of $625 over three years.
The average return is an important measure for comparing different investments or portfolios and can help to determine whether an investment is performing well or not, relative to its peers or historical benchmarks.