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Average Rate Of Return Formula:
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The Average Rate Of Return (ARR) is a financial metric that calculates the average annual return of an investment over a specified period. It provides a simple way to understand the overall performance of an investment by averaging out the yearly returns.
The calculator uses the ARR formula:
Where:
Explanation: This formula calculates the simple arithmetic mean of annual returns, providing a straightforward measure of investment performance over time.
Details: ARR is widely used in investment analysis to compare different investment opportunities, assess portfolio performance, and make informed financial decisions. It helps investors understand the typical yearly return they can expect from an investment.
Tips: Enter annual returns as comma-separated percentages (e.g., "5, 8, 12, -2, 15"). The calculator will automatically calculate the average and display the detailed calculation process.
Q1: What is the difference between ARR and CAGR?
A: ARR calculates simple average return, while CAGR (Compound Annual Growth Rate) accounts for compounding effects and provides the geometric mean return.
Q2: When should I use ARR instead of other return metrics?
A: ARR is best for quick comparisons and when returns are relatively stable. For volatile investments or long-term analysis, CAGR may be more appropriate.
Q3: Can ARR be negative?
A: Yes, if the investment has negative returns in some years, the ARR can be negative, indicating an average loss over the period.
Q4: What are good ARR values for investments?
A: This varies by asset class and risk tolerance. Generally, ARR above inflation rate (2-3%) is considered positive real return, while 7-10% is typical for stock market investments.
Q5: Does ARR consider the time value of money?
A: No, ARR is a simple average that does not account for the time value of money or compounding effects.