Average Return

  

Average returns are pretty easy to calculate, but not terribly specific (wouldn't you know it, finally an easy calculation and it's not accurate). This is the average of a series of returns, over a specific period of time. It's found by adding all the sums together, then dividing by however many periods you're measuring (you know, averaging).

Some of more common return measures used are Return on Assets (ROA), which is Net Income/Total Assets; Return on Investment (ROI), equation: (Gain from Investment - Cost of Investment)/Cost of Investment; and Return on Equity (ROE), equation: Net Income/Shareholder's Equity.

These different formulas are used based on whether you're measuring returns on an asset (something non-real estate you own), an investment (for example, shares in a business) or property you own.

Related or Semi-related Video

Finance: How Do You Calculate Rates of R...35 Views

00:00

finance - a la shmoop how do you calculate rates of return? well invest a dollar get

00:08

more than a dollar back right? well yeah you hope so anyway in in finance land [dollar bill on table]

00:13

and Wall Street and any other professional gig. well rates of return

00:17

from financial investments are generally stated as annual returns, so calculating

00:23

a rate of return revolves around the one year at a time thing. there are a ton of

00:29

curveballs that get thrown into these calculations. here's a big one,

00:33

dividends. well guess what clueless financial journalists with little to no [dividends defined]

00:37

real schooling in finance quote stock market returns all the time. let's say

00:41

that shares in random example industries traded at the same price at the

00:46

beginning of the 1970s as they did at the end of the decade. prices for random

00:51

example industries were totally flat from 1970 to 1980. that's what one of

00:56

those journalists might say. and they don't even get fired for making such a [man reports news]

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narrow statement .no nothing happened at all. and wrong. had they taken this course

01:04

they'd have realized that monster-sized dividends were paid out during that time

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period. five six seven eight percent a year, each year. yet the journalists

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ignored them when they stated that the stock market was in fact flat for a

01:18

decade and maybe shares of that company were also flat for a decade. but it

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implied that they got no return from their investment which is absolutely [icons of stock market and a stock deflate]

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wrong. did readers get their money back for that bad journalistic work? yeah we

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doubt it - well what about zero coupon bonds? that is their bonds that pay no

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dividends or interest along the way and they sell at a discount to par. what does

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that mean? that is $1,000 par value bond pays you a grand in seven years. well how

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do you calculate the annualized rates of return there? well today that bond sells

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for six hundred forty two dollars. like you buy it today for six hundred forty

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two you get a thousand bucks in seven years. well what's the rate of return on [zero coupon bond rates of return listed]

02:00

that bond? hmm. well vanilla bonds like these we're a whole lot easier to

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calculate. because like you got the interest rate right there on the thingy.

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yeah so the question is really what interest rate will accrue and then

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compound for this bond such that in exactly seven years you get a thousand

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bucks? well if it compounded at ten percent a year the compounding would

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look like this. you see the table right there and whoa we've already passed the

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grand way ahead of seven years. so the compound rate must be less than ten

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percent right well what if it compounded at five percent a year well then the [compound rate listed]

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rates of return would look like this and basically we're just multiplying 1.0

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five times a 6.2 and we take that compound totally multiply 1.05 again and

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so on and so on. much closer .well here's the formula you'll want to remember.

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where f is the face value PV is the present value and n is the number of

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periods. well in our example the face values a thousand bucks, the present

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value is 642 dollars and the number of periods is the number of years or seven

03:05

years. all right well then we just you know put our handy-dandy calculator to [mathematical formula shown]

03:08

work and get a yield of well right around here. so here's the key idea rates

03:14

of return are an annual thing when quoted among finance professionals. among

03:20

fun dance professionals well and maybe a different story. [three stooges pictured]

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