1. What is Average Rate of Return (ARR)?

Average Rate of Return (ARR) is the arithmetic average of investment returns over multiple periods. It provides a simple measure of the average performance of an investment over time.

2. How Does the Calculator Work?

The calculator uses the ARR formula:

Where:

• \( \text{Sum of annual returns} \) — Total of all annual return percentages
• \( \text{Number of years} \) — Count of periods being analyzed

Explanation: ARR calculates the simple arithmetic mean of investment returns, providing an average performance metric without considering compounding effects.

3. Importance of ARR Calculation

Details: ARR is commonly used to evaluate investment performance, compare different investment options, and assess the historical returns of portfolios and funds.

4. Using the Calculator

Tips: Enter annual returns as comma-separated percentages (e.g., "12, 15, 8, -2, 10"). All values must be valid numbers representing percentage returns.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between ARR and CAGR?
A: ARR is arithmetic average while CAGR (Compound Annual Growth Rate) accounts for compounding effects. CAGR is generally more accurate for long-term performance.

Q2: What are good ARR values?
A: Good ARR depends on the asset class and risk profile. Generally, positive returns above inflation rate are considered good, with higher returns indicating better performance.

Q3: When is ARR most useful?
A: ARR is most useful for short-term analysis, comparing multiple investments with similar risk profiles, and when returns are relatively stable.

Q4: What are limitations of ARR?
A: ARR doesn't account for compounding, volatility, or the sequence of returns. It can be misleading if returns are highly variable.

Q5: Can ARR be negative?
A: Yes, ARR can be negative if the sum of annual returns is negative, indicating an overall loss over the period.