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Average return, also known as arithmetic mean return, is a measure used in finance to assess the historical performance of an investment or portfolio. It provides an indication of the average gain or loss over a specific period.

To calculate the average return, you sum up the returns of an investment or portfolio for each period and divide it by the number of periods. The returns can be expressed as a percentage or a numerical value.

For example, let’s say you have an investment that generated annual returns of 5%, 8%, and -2% over a three-year period. To calculate the average return, you would add up the individual returns (5% + 8% + -2% = 11%) and divide it by the number of periods (3). In this case, the average return would be 11% / 3 = 3.67%.

Average return is commonly used to evaluate the historical performance of investments, compare different investment options, or measure the performance of a portfolio manager. However, it’s important to note that average return alone may not provide a complete picture of an investment’s performance, as it doesn’t account for the volatility or variability of returns over time.

To get a more comprehensive understanding of an investment’s performance, it’s often useful to consider other measures such as standard deviation, risk-adjusted return metrics (e.g., Sharpe ratio), and other relevant factors specific to the investment or portfolio under analysis.