Average return is not a promise
A historical average describes a certain period; it is not a commitment to a future outcome.
Two investments with the same average can experience different swings. Correlation describes joint movement and does not prove causation. Choosing the start and end dates changes the return you show.
One year +50% and the next year −50%: 100 becomes 150 and then 75. The arithmetic average is 0%, but in reality there is a 25% loss.
Explain the example in your own words and check the calculation.
Investor.gov · Risk and Return ↗Check your understanding
After +50% then −50%, what remains from 100?
- 100
- 75
- 125
Answer and explanation
75. 100 times 1.5 times 0.5 equals 75.
If two things changed together, did one cause the other?
- Certainly
- Not necessarily
- Only on a green chart
Answer and explanation
Not necessarily. Correlation alone is not proof of causation.