How to calculate average rate of return?
Understand the Problem
The question is asking for the method or formula used to calculate the average rate of return on an investment. This typically involves determining the total return over a period and dividing it by the number of investments or time periods to find the average.
Answer
Final Value: (FV - IV) / IV, Average Rate: Total Return / Number of Periods
Answer for screen readers
Find the total return on the investment, then divide by the number of periods.
Steps to Solve
- Identify Total Return and Time Periods
Find the total return on the investment over the period. The total return is calculated as the final value of the investment minus the initial value. Identify the number of time periods (e.g., years) over which the investment return is being measured.
- Calculate the Total Return
Use the formula:
$$ ext{Total Return} = rac{ ext{Final Value} - ext{Initial Value}}{ ext{Initial Value}}$$
- Calculate the Average Rate of Return
Use the formula:
$$ ext{Average Rate of Return} = rac{ ext{Total Return}}{ ext{Number of Time Periods}}$$
This will give you the average rate of return over the specified period.
Find the total return on the investment, then divide by the number of periods.
More Information
The average rate of return is a simple measure of an investment's performance over a period, smoothing out fluctuations.
Tips
Ensure to use the same units for initial and final values. Common mistakes include incorrect time period count and misinterpreting percentage points.
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