Average Return Calculator

What Is Average Return?

Average return is the typical gain or loss an investment earns over a specific time period. In this calculator, the first method estimates the rate of return based on how the starting balance grows into the ending balance, while considering all deposits and withdrawals made during the investment period. This method factors in the time value of money, a core financial principle that states money available today is more valuable than the same amount in the future due to its earning potential.

The second calculation approach determines the average return by adding up all periodic returns and dividing the total by the number of periods. Like the first method, it also incorporates the time value of money to give a more accurate reflection of long-term investment performance.

Average Rate of Return (ARR)

The Average Rate of Return (ARR), also known as the accounting rate of return, represents the average annual income generated by an investment throughout its lifespan. Unlike the average return methods mentioned earlier, ARR does not adjust for the time value of money. Because of this, ARR is best used alongside other financial metrics when evaluating investment opportunities, especially for long-term projects or significant capital decisions.

Understanding Cumulative Return

Cumulative return shows the total profit or loss from an investment, regardless of how long it’s held. It can be expressed either as a percentage or a dollar amount. This differs from annual return, which focuses solely on the investment’s performance in a single year, and from the average annual return, which spreads total returns evenly across the years in the investment period.

Since most financial comparisons are based on annualized returns, cumulative return may offer limited insight on its own. For a clearer picture of performance, it’s recommended to use cumulative return together with other metrics, much like ARR.