What is the average return?

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portfolio of investments faces risks that could affect the actual revenue earned by the investor. There is no method to accurately calculate the actual return, but the average return takes into account the risks facing the portfolio and calculates the rate of return that the investor can expect to obtain from this particular portfolio. Investors can use this concept to calculate the expected return of securities and firm managers can make it a decision on whether to accept a project to take over a project. Then it uses these numbers to determine the probable project value. For example, the project has a good circumstances of 25 % probability that it will generate $ 1,200,000 (USD), which is 50 % probability that it normally generates $ 1,000,000 USD and $ 25 % probability of generating $ 800,000 in poor circumstances. The average project yield is then = (25% x $ 1,200,000) + (50% x $ 1,000,000) + (25% x 800,000 USD) = $ 1,000,000.

In the analysis of securities, the average yield may apply to security or portfolio of securities. Every portfolio security has an average return calculated by a formula similar to that for capital budgeting and portfolio also has a return that predicts the average expected value of all probable revenues of its securities. For example, an investor has a portfolio consisting of 30 percent of shares A, 50 percent of shares B and 20 percent of shares C. The average return of shares A, shares B and shares C is 10 percent, 20 percent and 30 percent respectively. The average portfolio return can then be calculated to = (30% x 10%) + (50% x 20%) + (20% x 30%) = 19 percent.

This type of calculation may also show an average return over a period of time. Make this calculation, there must be data for several periods of time, with a higher number of periods generating more accurate results. For example, if a company gets a return on 12 percent in year 1, -8percent of the year 2 and 15 percent in year 3, then the annual arithmetic average yield = (12% - 8% + 15%) / 3 = 6.33%.

Geometric average yield also calculates proportional change in wealth over a period of time. The difference is that this calculation shows the level of growth of wealth if it grows at constant speed. Using the same numbers as the previous example, the annual geometric average yield is calculated to = [(1 + 12%) (1 - 8%) (1 + 15%)]

1/3

- 1 = 5.82%. This figure is lower than the arithmetic average yield because it takes into account the effect of the composition if the interest is applied to an investment that has already received interest in the previous period.