How to Calculate Average Return
What is Average Return?
Average return (CAGR — Compound Annual Growth Rate) is the constant annual growth rate that would produce the same result as actual investment growth over a period. Unlike simple average return, CAGR accounts for compounding and gives a more meaningful comparison.
Step-by-Step Guide
- 1CAGR = (End Value / Start Value)^(1/Years) − 1
- 2Total return = (End − Start) / Start × 100%
- 3Simple average of annual returns can be misleading with volatility
- 4CAGR is always lower than or equal to the arithmetic mean of annual returns
Worked Examples
Input
$10,000 grows to $18,000 over 5 years
Result
CAGR = 12.47%/year
(18000/10000)^(1/5) − 1
Input
S&P 500: $10,000 in 1990 → $170,000 in 2023
Result
CAGR ≈ 10.7%/year
Consistent with long-term market history
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