How to Calculate the Average Return on an Investment

Return on Investment (ROI) is perhaps one of the most commonly used metrics in the world with regard to making buy or sell decisions on an investment. In one simple calculation, the metric can tell you how much you have made or can expect to make on a particular investment. While the genius of the calculation is in its simplicity, the calculation is only as good as the data you input--which is why finding accurate inputs is so important. Average return on investment looks at the average return for at least two periods of time.

Step 1

Determine the cost of the original investment. This is the total cost, including transactions fees or any other cost of acquisition.

Step 2

Determine the return for at least two different points in time, in order to get an average. This means you must determine what the price of the investment is at two points in time. If the asset trades on a national exchange, use the most recent price quote as a proxy for your return measure. If the asset is illiquid, like real estate, hire an appraiser or look at comparable sales in the same location with the same features. Do this for two different points in time. For instance, if you've held an investment for five years, do this for years 3 and 5.

Step 3

Determine the average market value. Let's say you purchased real estate that was worth $100,000 5 years ago. In Year 3 it was worth $120,000 and in Year 5 it is worth $110,000. The average market value for Year 3 and 5 is $115,000 (($120,000+$110,000)/2).

Step 4

Calculate the difference between the average return value and the original market value. The difference in our example is $15,000 ($115,000 - $110,000). It is a $15,000 gain.

Step 5

Calculate the ROI. Divided the difference by the initial market value. In our example the calculation is $15,000 / $100,000 or 15 percent.