Understanding Average Return

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Average return is a way to measure the performance of an investment over a period of time. It's typically calculated by taking the sum of all the returns over a certain period, and then dividing that sum by the number of periods. So, if you had an investment that returned 10% in the first year, 20% in the second year, and 5% in the third year, the average return would be (10+20+5)/3 = 11.67%.

Now, why is average return important? Well, it gives you a general idea of how well your investment is doing. It's a way to compare the performance of different investments and see which one is performing better. And, it's also a way to see how your investment is doing over time.

But, here's the catch: average return doesn't take into account the volatility of an investment. Volatility is the measure of how much an investment's return varies over time. So, an investment with a high average return but high volatility, may not be as good as an investment with a lower average return but lower volatility.

This is where the concept of "risk-adjusted return" comes in. Risk-adjusted return takes into account both the average return and the volatility of an investment. It's a way to measure the performance of an investment while considering the risk involved.

If you're looking to invest your money, it's important to consider both the average return and the risk-adjusted return of an investment. Look for investments with a high average return and low volatility. And, also, diversify your investments across different asset classes and sectors to spread the risk.

Average return is a way to measure the performance of an investment over a period of time, but it doesn't take into account the volatility of an investment. Risk-adjusted return takes into account both the average return and the volatility of an investment and it's a better way to measure the performance of an investment while considering the risk involved. When investing, it's important to consider both average return and risk-adjusted return and diversify your investments to spread the risk.

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