Average Return Calculator

Arithmetic mean is a simple average of returns. Geometric mean accounts for compounding and shows actual growth rate. Example: +50% then -50% gives 0% arithmetic mean but -25% geometric mean (true outcome). Always use geometric mean for multi-year performance.

CAGR (Compound Annual Growth Rate) is the constant annual return that would produce the same final value. If $10,000 grows to $15,000 in 5 years, CAGR = 8.45%. It equals the geometric mean for annual returns and smooths out volatility.

Sharpe ratio measures risk-adjusted return: (Return - Risk-Free Rate) / Volatility. Higher is better. >1 is good, >2 is very good, >3 is excellent. It helps compare investments with different risk levels. A 10% return with 5% volatility beats 12% return with 20% volatility.

Volatility (standard deviation) measures return variability. High volatility means bigger swings up and down. Two portfolios with same average return but different volatility will have different final values due to sequence of returns risk. Lower volatility often means higher geometric return.

Compare geometric mean to benchmarks (S&P 500 ~10%). Check Sharpe ratio for risk-adjusted performance. Volatility shows risk level. The gap between arithmetic and geometric mean indicates volatility drag - larger gap means volatility hurt returns more.