💰 Financial
Average Return Calculator
Calculate the arithmetic average and the geometric average (CAGR) of a series of investment returns to understand your true portfolio performance.
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Formula
Arithmetic Mean = (r1 + r2 + ... + rn) / n
Geometric Mean = [(1+r1) × (1+r2) × ... × (1+rn)]^(1/n) - 1r- Return for a specific period (as a decimal)
n- Number of periods
Example
Arithmetic vs Geometric Returns
Your portfolio drops 50% in Year 1, then gains 100% in Year 2.
- Arithmetic Average: (-50% + 100%) / 2 = +25% average return.
- Geometric Average: If you start with $100, it drops to $50, then doubles back to $100. Your total growth is 0%.
- Result: The Geometric Average (CAGR) correctly shows 0%, while the Arithmetic Average misleadingly suggests you made money.
Frequently Asked Questions
Because of volatility drag. The arithmetic average ignores the compounding effect of losses. To recover from a 50% loss, you need a 100% gain just to break even. The geometric average accounts for this reality, making it the most accurate measure of actual wealth growth.