How to Calculate Average Real Return
A real return is the return that does not include any inflation. During the year, an investment usually will bring a return. However, also during the year, prices will usually increase due to inflation. The return with inflation is known as the nominal return. So when you deduct the inflation for the year, the return becomes the real return. Investors can use the average return for several investments to find the average real return of those investments.
Determine the return on the investments. If the return is not given, then calculate return by dividing the change in the investment for the year by the price of the investment at the beginning of the year. For example, at the beginning of 2008 a stock price was $40 a share and at the end of the year the stock price was $50 a share. Therefore, $10 divided by $40 equals a return of 0.25 or 25 percent. The investor also had returns on stocks of 5 percent, 18 percent, 14 percent and 17 percent.
Subtract the inflation rate for the period from the return. Several websites provide this information. For example, the inflation rate of 2008 was 3.85 percent. In our example, 25 percent minus 3.85 percent equals a real return of 21.15. The other real returns are 1.15, 14.15, 10.15 and 13.15.
Add together the real returns. In our example 21.15 plus 1.15 plus 14.15 plus 10.15 plus 13.15 equals 59.75 percent.
Determine the total number of investments. In our example, there were five investments.
Divide the sum of the real returns by the total number of investments. In our example, 59.75 divided by 5 equals an average real return of 11.95 percent.