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How Do You Calculate Mean Yield?

Published in Financial Calculations 3 mins read

To calculate the mean (average) yield of an investment over a period, you need to determine the annual yield for each year, and then calculate the average of those annual yields.

Here's a breakdown of the process:

Steps to Calculate Mean Yield

  1. Calculate Annual Yield for Each Year: The annual yield represents the percentage return on an investment in a single year. It's calculated using the following formula:

    Annual Yield = (Total Return / Initial Investment) * 100
    • Total Return: This is the net profit or loss from the investment during the year. It includes dividends, interest, and capital gains (or losses) from the sale of the asset.
    • Initial Investment: This is the amount of money you initially invested.

  2. Sum the Annual Yields: Add up all the annual yields calculated for each year of the investment period.

  3. Divide by the Number of Years: Divide the sum of the annual yields by the number of years you held the investment. This gives you the mean (average) annual yield.

    Mean Yield = (Sum of Annual Yields) / Number of Years

Example

Let's say you invested \$1,000 in a stock, and you want to calculate the mean yield over 3 years:

  • Year 1: You earned \$50 in dividends and the stock increased in value by \$100. The annual yield would be ((\$50 + \$100) / \$1000) * 100 = 15%.
  • Year 2: You earned \$60 in dividends and the stock decreased in value by \$20. The annual yield would be ((\$60 - \$20) / \$1000) * 100 = 4%.
  • Year 3: You earned \$70 in dividends and the stock increased in value by \$80. The annual yield would be ((\$70 + \$80) / \$1000) * 100 = 15%.

To calculate the mean yield:

  1. Sum of annual yields: 15% + 4% + 15% = 34%
  2. Number of years: 3
  3. Mean yield: 34% / 3 = 11.33%

Therefore, the mean annual yield for this investment over the 3 years is 11.33%.

Important Considerations

  • Compounding: This method provides a simple average. It does not account for the effects of compounding, where returns in one year generate further returns in subsequent years. For a more accurate representation of overall investment growth, consider using metrics like Compound Annual Growth Rate (CAGR).
  • Fees and Taxes: Remember to factor in any fees or taxes associated with the investment when calculating the total return. These expenses will reduce the overall yield.

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