Average Return Calculator | Investment Returns Calculator
Calculate different types of investment returns including arithmetic mean, geometric mean, and dollar-weighted return with our free online average return calculator.
Category: Financial
Frequently Asked Questions
What's the difference between arithmetic mean and geometric mean returns?
Arithmetic mean is a simple average of returns calculated by adding all percentage returns and dividing by the number of periods. Geometric mean (CAGR) accounts for compounding effects by calculating the single rate of return that would give the same final value. Geometric mean is always less than or equal to arithmetic mean and provides a more accurate measure of actual investment performance over time.
What is dollar-weighted return?
Dollar-weighted return (also known as money-weighted return or internal rate of return) takes into account both the timing and amount of cash flows in and out of an investment. It gives more weight to periods when more money was invested. This is particularly useful when evaluating investments with significant cash inflows or outflows at different times.
Why do my investment returns look different from what my broker reports?
Brokers may use different methodologies to calculate returns. Time-weighted returns (similar to geometric mean) are commonly used by investment managers because they eliminate the impact of cash flows that are outside the manager's control. Dollar-weighted returns may better reflect your personal investment experience since they account for when you added or withdrew money.
Which average return method should I use for my investments?
For comparing investment options or evaluating investment managers, use geometric mean (CAGR) as it better represents compound growth over time. For understanding your actual experience as an investor with multiple cash flows, use dollar-weighted return. Arithmetic mean is mainly useful for statistical analysis or projecting future single-period returns.