AlibomicsMoney and Economics
CONCEPT LESSON

Arithmetic average return

The sum of periodic returns divided by the number of periods.

Why it matters

A single number can answer different questions poorly. Distinguish an average period from the growth of an invested balance.

A worked example

For +10%, −5% and +7%, the arithmetic average is (10 − 5 + 7) ÷ 3 = 4%.

Illustrative example · simplified assumptions

A common mistake

Assuming the arithmetic mean reproduces compounded growth.

Where the idea needs care

This describes the average period, not the compounded growth of your money.

Apply the idea

Explain this concept using a different example from your spending, work, business or a policy debate. State what stays fixed and what could change the result.

CHECK YOUR UNDERSTANDING
What is the mean of 10%, −5% and 7%?

Read the answer and explanation

4%. This describes the average period, not the compounded growth of your money.

See the supporting infographicArithmetic average return: The sum of periodic returns divided by the number of periods.

The written explanation above is the main lesson. This image offers another way to remember it.

Sources and further study

Examples and explanations by Alibomics. Numeric illustrations are not current market quotations.