Average Return Calculator
The Average Return Calculator can calculate an average return for two different scenarios. The first is based on cash flows, and the second calculates a cumulative and average return of multiple investment returns with different holding periods.
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*The cash flow method uses an internal rate of return with actual dates (XIRR). Starting balance is treated as an initial investment (outflow), deposits are additional investments (outflows), withdrawals are returns (inflows), and the ending balance is assumed liquidated at end date (inflow). Annualization is based on exact day counts.
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*Cumulative return multiplies the growth factors for each period. Average annual return is the geometric annualized rate across all periods using total holding time.
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These calculators provide educational estimates and are not a substitute for professional advice.
Average Return
The average return is defined as the mathematical average of a series of returns generated over a period of time. In the cash flow method, it is the rate at which the beginning balance grows to the ending balance based on deposits and withdrawals that occur over time. The time value of money is applied, reflecting that a dollar today is worth more than a dollar tomorrow. For multiple returns, the average return represents the total return across all holding periods normalized on an annual basis, also accounting for time value.
Average Rate of Return
The average rate of return (ARR), sometimes called the accounting rate of return, is the average amount (usually annualized) of cash flow generated over the life of an investment. ARR does not account for the time value of money. For major financial decisions, it’s best to use ARR alongside other metrics.
Both calculators here incorporate the time value of money. Average return and ARR are commonly used methods to compare performance, each offering a different perspective.
Cumulative Return
Cumulative return is the aggregate gain or loss on an investment over the entire period, without regard to how many years it spans. It is different from an annual return, which measures a single year, and different from an average annual return, which converts multi-year performance into a yearly rate. Because most financial analysis compares annualized figures, cumulative return is most useful when paired with annualized metrics.