In the example given above, the arithmetic average of 2.3% will turn out to be wrong and misleading, if weightages are unequal. In the area of personal finance and investments, the relevance refers to the varied amounts of investments made, which is technically termed weightages. However, the average return may be ineffective when various investments have different levels of relevance. For example, there are three stocks that have generated 10%, 5% and -8% returns in the past one year and therefore, the arithmetic or average return works out to 2.3%- divided by 3.
Average return is the simple average where each investment option is given an equal weightage. Several forms of returns are derived through different mathematical calculations and among these, average or arithmetic return is widely used.
Return is defined as the gain or loss made on the principal amount of an investment and acts as an elementary measure of profitability.
How to calculate weighted standard deviation in excel generator#
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