calculating rate of return
 

i'm trying to calculate the average rate of return and see to be having some issues compared to another person i'm comparing values with. am i on crack?


yr 2011 - rate of return: -7.20%
yr 2012 - rate of return: 12.11%

average rate of return over the two years: (-7.20 + 12.11)/2 = 2.455%

my buddy says two year rate of return is 10.39%.

how is it 10.39? am I calculating average wrong??

did you include dividend payments?

Why so complicated? And I think neither way is correct.

I do the following:

Money at start=A
Money at now=B

(B-A)/x=Average return per year where x is the year.

This would be the simplest way.

For more precise yearly figure you'd take the x root of (B-A)

Because you didn't say what number was used to come up with % figure at year 2. (assuming it's the balance of year one, then the return is a bit over 4%, or even slighter over 2% if compounded yearly)

for the individual years, they have dividend payments included. the -7 and 12 have everything included when considered individually.

(B-A)/x=Average return per year where x is the year.

the average rate for year 11 is -7 and average rate for year 12 is 12.

what i want to know is over the past two years i have averaged X.. what is X?

edit: why would anyone need the balances? The individual yearly rates of return are given =\

1*0.928*1.1211=x (the 1 isn't necessary, but I'm showing it as your capital base) 0.928 is 1-0.072 representing year 11 loss of 7.2%
x-1=y
y/2= your average rate of return, I get 2.02%

The way you've done it is a simple average of two numbers, your capital will decrease after year 11, so your 12.11% return in year 12 is on a smaller capital base

With this information, neither of you appear correct

What course and institution is this for?

I actually missed a step... my excel I use:
[(B-A)/A]/x

Assuming you started with $100, by your example, at end of year 1 you had $92.8 (100*0.928) while year 2 is $104.04 (92.8*1.1211). The formula works as
(104.04-100)/100=0.0404
And 0.0404/2 (x=2 years)=0.0202 or 2.02%.

Precisely, at yearly measurement, take square (since 2 year) root of 0.0404=0.020099, you have about 2%.

it's not for school. i'm trying to figure out what my ror is on some investments i own and if i should can them before year end of year.

i'm trying to see if i'm hitting my goal of achieving 5-7% return on average per year over 2/3/4/5 year period. (my goal is over 5yr period)

lets use some numbers here.

year 2010 - amount invested 4000 - rate of return = 1.29%
year 2011 - amount invested 1700 - rate of return for year = -7.2%
year 2012 - amount invested 1600 - rate of return for year = 12.11%

i'm super confused by your guys's 1-x +y = Z stuff...

Yikes - if you can't do that math, and if past performance dictates sell decisions, you should get a professional to manage your money.

Your financial literacy is low, based on this so your decision making may be on inaccurate and poor information
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i've never evaluated based on past performance. this is my first time - why now? I want to see if i'm hitting my goal. by the end of 2013 - i'm 4/5 into my 5yr goal.



This is what I was looking for - I guess it was called annualized returns and I needed to provide the begining / ending balances
http://luminouslogic.com/how-to-comp...-of-return.htm

Your problem is that you have different capital bases with withdrawals and deposits. The easiest thing to do is to use XIRR:

XIRR stuff