Calculating Average Returns

The obvious way to calculate the average returns on the different investments in Table 12.1 is simply to add up the yearly returns and divide by 75. The result is the historical average of the individual values.

For example, if you add up the returns for the large-company stocks in Figure 12.5 for the 75 years, you will get about 9.75. The average annual return is thus 9.75/75 = 13.0%. You interpret this 13 percent just like any other average. If you were to pick a year at random from the 75-year history and you had to guess what the return in that year was, the best guess would be 13 percent.

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